One of the many federal tax changes in 2018 is that the annual gift tax exclusion amount has increased from $14,000 to $15,000. This change is actually due to inflation rather than the Tax Cuts and Jobs Act of 2017 signed into law this past December. What does the exclusion amount really mean? The exclusion amount is how much a person can gift to a particular person or entity before needing to file a federal gift tax return. (Maine does not have a state-level gift tax.) And because this exclusion applies to individuals, a married couple can use each person’s exclusion amount to make a total of $30,000 in gifts to someone before a gift tax return is needed. Even if a gift tax return is needed, it is unlikely that the giver would ever owe gift tax because each person has an annual lifetime exemption that is coupled with his or her estate tax exemption amount.
When the Maine and federal estate tax thresholds were much lower, annual gifting might have been part of a person’s estate plan. A person might make annual gifts at or below the gift tax exclusion amount to children or other beneficiaries to reduce his or her taxable estate at death. This has become less common as a planning technique as the estate tax threshold has increased. With the 2017 tax reform, the estate tax exemption was raised from $5,600,000 to $11,200,000 per person for 2018; at the federal level, married couples can make elections that allow them to maximize each person’s individual exemption amount. Therefore, annual gifting as an estate planning strategy is relatively rare.
But, questions about what the annual gift tax exclusion really means still come up often. Typically, this is because there are misunderstandings about how the annual gift tax exclusion amount intersects with MaineCare long-term care planning. Many people assume that because they can make a gift of (now) up to $15,000 without needing to file a gift tax return that they can also gift up to that amount before being penalized by the Maine Department of Health and Human Services when applying for long-term care benefits. However, that is generally not correct.
The MaineCare long-term care regulations do not penalize gifts to a spouse, a blind or disabled child, or a trust for a disabled person under age 65; a gift of a home to a child who lived in the home and provided care that allowed the giver to remain in the home for two years before entering a facility; cumulative gifting below $500 per calendar quarter; and a few less commonly used exceptions. But, gifts within the 60 months prior to applying for benefits that do not fall within these exceptions will cause DHHS to calculate a penalty period. The amount of the gift determines how long the penalty period will last and therefore how many months the giver will have to private pay for care. Because DHHS caseworkers conduct a thorough review of the past 60 months of a person’s financial documentation prior to approving long-term care benefits, these prior gifts are detected. And due to the high cost of long-term care, most people need to at least consider how MaineCare long-term benefit eligibility fits into their financial planning.
Whether gifting the asset is appropriate—despite the possible consequences for long-term care benefit eligibility—depends on many factors, such as the person’s age, health, overall finances, and the likelihood that the recipient could return the gift if needed. There are additional considerations depending on the particular asset. For example, with a home or other real estate that the giver wants to continue to use, a life lease should be retained as part of the transfer. Also, for real estate or other property that has significantly appreciated in value over time, it may be important to ensure that a step-up in tax basis can be achieved upon the giver’s death, which thereby reduces the likelihood that the recipient will have to pay capital gains tax if the property is ever sold.
Because the gift tax and MaineCare long-term care benefit eligibility are based on two different sources of federal law, gifting has different implications for each. You should consult an attorney when deciding if regular gifting or transferring a sizeable asset should be part of your financial planning.