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By John M. Bigler A little bit of knowledge can be dangerous. That expression has proven particularly true with Medicaid planning, where many people are led astray by well meaning friends, family and even professionals, who insist on giving simplistic advice regarding one of the most complicated systems of laws and regulations. But Medicaid planning is not the only area where simplistic advice can cause serious financial problems. Gift and estate tax planning, which typically goes hand in hand with Medicaid planning, is also complicated and subject to simplistic advice.
Another common incorrect assumption is that the person who receives the gift is liable for the gift tax. The purpose of the gift tax is to discourage people from distributing their wealth to avoid paying estate tax upon death. Therefore, the tax is on the person who makes the gift, not the recipient. However, the recipient should note that any interest generated by the gift is considered income for income tax purposes. The greatest misconception that I deal with on a regularly is lack of awareness that in addition to being allowed to make gifts of $11,000 per year per person each of us also has a $1 million lifetime gift tax exclusion. Those worried about making a gift of more than $11,000 to a family member have no need for concern, unless they are millionaires. In Medicaid planning, there will very often be a need to distribute the assets of a person who is attempting to qualify for either institutional or community Medicaid.
I regularly see families who are greatly concerned with how they are going to split the older person's assets in $11,000 increments. I can see it in their eyes as they count nieces, nephews and distant cousins and wonder who is trustworthy and who is not. I assure them that they can simply transfer assets to people with whom they are comfortable to hold on the their behalf without any gift tax consequences other than the need to file a gift tax return. For example, an individual who needs to transfer $300,000 and has three children can simply transfer that money to the three children and there is no gift tax consequence at all. Wealthier people, who really should not be considering Medicaid planning, sometimes in panic will transfer assets exceeding $1 million in the hope of avoiding possible nursing home costs in the future. What they don't realize is that they're subjecting themselves to both federal and state gift taxes, which are significant for transfers over $1 million. Often, that gift tax that far exceeds the hypothetical nursing home costs they were worried about.
The government also has an answer for those not passing on their assets until death: the estate tax. In 2005, each of us can pass $1.5 million at the time of death without paying any federal estate tax. There will be New York State estate tax for the amount exceeding $1 million, but it is the federal gift tax - which can be as much as 50%- that's of greatest concern. For a very long time the limitation for assets passing estate-tax-free was $600,000. That number was increasing in small increments, but when the Bush administration took over there was a significant increase to $1 million and now $1.5 million. In 2006 the exception will increase to $2 million and in 2009 to $3.5 million. In 2010 the current law will expire; if nothing is done the exception could drop back down to a much lower number. At present, the administration is pushing for the elimination of the estate tax altogether. Of course, as always, the administration's intent is to alleviate the tax burden on the very wealthy, who as we all know are the major supporters of this administration. However, I do admit that many of my clients have become almost accidental millionaires with the increase of real estate values. For them, the increase of estate tax exemption and its possible elimination would be beneficial. Many middle class people who in the past had to do sophisticated estate tax planning - wills with credit shelter trusts, life insurance trusts or family limited partnerships - no longer need to do that type of sophisticated planning.
The administration's intent to eliminate the estate tax is not without opposition. On July 21, Federal Reserve chairman, Alan Greenspan testified before the Senate banking, housing and urban affairs committee. He indicated his opposition to tax cut proposals that increased the deficit and made clear that his opposition applied to the repeal or drastic reduction of the estate tax without first considering a full offset of the costs. Mr. Greenspan has called for the reinstatement of the "pay as you go" rule, which requires the cost of tax cuts to be offset so that they do not increase the deficit. He advised Congress not to repeal the estate tax if the costs of repeal were not offset.
For the time being we remain in a state of limbo regarding estate taxes. It's unlikely that once the increase reaches $3,5 million it will ever be reduced. However, it's important to understand at the very least that there is a $1 million gift tax exemption, making concern about splitting assets amongst many different family members and friends unwarranted.
Reprinted with permission of the Suffolk Times © 2005 [ Contact Us ] [ Guestbook ] [ Email ]  The Law Offices of John M. Bigler, Attorney At Law 1421 Wantagh Avenue, Wantagh, New York 11793-2206 1-888-ELDER-LAW · 516-409-6565 · Fax: 516-409-6522 E-Mail: info@biglerlaw.com · Web Site: www.biglerlaw.com |
Most people are aware that gifts up to $11,000 each can be made each year without paying any gift tax. However, many people believe that such gifts can be made only to relatives, which is not true. Such gifts can be made even to a complete stranger with no gift tax due.