PLANNING AHEAD: Common myths on gifts and the federal estate and gift tax [Column]

There are certain ideas that become so ingrained in the consumer public’s psyche, that they seem almost impossible to dislodge. One of these in the area of estate and financial planning is the notion that the U.S. federal government prohibits gifting over a certain amount, currently $16,000.

Some taxpayers remember when the number was as low as $10,000. Depending on the person who is voicing the concept, the $16,000 (or whatever amount the taxpayer remembers) per year gifting concept could be interpreted as any one or more of the following. All of these concepts are wrong.

Here are some of the myths:

• The federal government prohibits taxpayers from gifting more than $16,000 per year; not true.

• There is income tax on any gifts to another person for more than $16,000; not true.

• There is gift tax payable now if a donor gives more than $16,000 per year total; not true.

• Married couples are prohibited from gifting more than $32,000 per year total; not true.

• Gift tax rules only apply to cash or cash equivalents (stocks, bonds, CD’s and similar) and not to residences, business ownerships and other assets; not true.

• The Medicaid rules prohibit gifting more than $16,000 per year per individual or $32,000 per couple. Not true, and this is especially important since the Medicaid gifting rules are totally unrelated to federal estate and gift tax rules and, in practically all instances are much stricter than the federal estate and gift tax rules.

It is very possible that, of all the federal taxes, the United States gift tax is the least understood.

First, we have a unified estate and gift tax in the U.S.  Neither the U.S. government nor any other level of government prohibits gifting in any amount.  There is, frankly, a real question whether they could. Gifting is a legitimate way to transfer wealth.

The federal government does indicate the filing of a United States gift tax return (Form 709) if a donor gifts (in 2022) more than $16,000 to any one individual during the calendar year. There are many ways around this and the filing of a return is not equivalent to owing tax. In the vast majority of cases the donor does not owe tax and even if he or she did it would not come due unless there was a very substantial estate at the time of death.

If a married couple gifts they can structure the gift so that together they are giving $32,000 to each beneficiary. They can give the amount to their son or daughter, their daughter in law and son in law and to each of their grandchildren. The annual gifting can be divided among years — December, 2022 for one and January, 2023 for the other.

Of critical importance to those facing nursing home care, the federal gift tax exclusion of $16,000 has absolutely nothing to do with Medicaid gifting rules. A structured Medicaid gifting program might indicate either more or less than the gift tax exclusion under any given circumstances.

If gift tax may not be due when a gift tax return is filed, the average reasonable consumer could ask, “Why does the federal government indicate a gift tax return should be filed?”

This is an excellent question. Unless the system is radically changed,  vast numbers of Americans will never owe federal gift or estate tax even if they give money or property away.

The federal gift tax return could be regarded as part of the federal government’s “bookkeeping” system. U.S. citizens have a unified credit against combined estate and gift taxes of $12.06 million and, with married couples and portability, it could be double that. This figure is currently slated to drop to $6.2 million ($12.4 million for married couples with portability) at the end of 2025.

The government wants to know how much of the unified credit has been used by wealthy individuals during their lifetime. Otherwise everyone could avoid federal estate tax just by anticipating death and gifting everything away during life. The significance to the individual of filing, however, can be substantial to establish a value as of the date of the gift. This can be very useful for their records when dealing with highly appreciated assets to establish the value (the basis) as of the date of the transfer. Interested individuals should consult with a financial professional or accountant before completing the forms.

Janet Colliton, Esq. is a Certified Elder Law Attorney recognized by the American Bar Assn and Pa. Supreme Court and limits her practice to elder law, retirement, special needs, estate planning and estate administration with offices at 790 East Market St., Suite. 250, West Chester, 610-436-6674, [email protected] She is a member of the National Academy of Elder Law Attorneys and, with Jeffrey Jones, CSA, co-founder of Life Transition Services LLC, a service for families with long term care needs.

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