How much can I gift to my children without paying tax? This is a question my clients have been asking me since I opened my practice.
Most of my clients have an estate worth between $100,000 and $800,000 including life insurance, their house, and their retirement accounts. If you bump the upper end of those figures to $5,000,000, fewer than 5% of my clients have more than the upper end. Over the course of my twenty-five years in practice, only a handful (maybe fingers- and toes-full) of my clients have owned an estate worth more than $10,000,000. If you own assets worth more than $10,000,000, congratulations, you are in the top 1% of asset-owners in the United States. Most of us simply don’t—and never will—have an estate worth more than $10,000,000.
Many clients consult with me to assist them with long-term care planning. The client is interested in protecting his/her assets in the event she needs care at home or in an assisted living residence or in a nursing home. Long-term care can cost anywhere from a few thousand to $15,000 a month, and long-term care can last a longtime. A person may need care in a nursing home for years before she dies. At $15,000 per month or $180,000 per year, three years of care in a nursing home, along with medications and incidentals, could easily cost in excess of $600,000.
If your estate is worth between $100,000 to $800,000 in assets, a $600,000 bill could deplete or nearly deplete your entire estate. For this reason, clients ask me to assist them with Medicaid planning, a perfectly legal form of planning that the New Jersey Supreme Court has said competent people want to, and should be permitted to, engage.
Let’s assume that Mrs. Smith comes to see me about protecting her assets from her potential long-term care costs. Mrs. Smith is 70 years old and is in reasonably good health. She has four, adult children all of whom are in reasonably good health. Mrs. Smith owns a house worth $400,000 and has cash assets of approximately $300,000. Mrs. Smith is comfortable transferring her assets to her children. She is concerned that if she transfers her assets, she or her children will have to pay tax on the assets that she transfers to them because she has heard that a person can only gift $10,000 a year without paying gift tax.
Mrs. Smith is not alone in thinking she can only gift a certain amount (be that figure $10,000, $11,000, $12,000, or some other figure) a year without paying gift tax or without her children paying some unspecified form of tax on the gifted assets. This misconception is nearly universal. The problem is, it is a misconception, and the misconception gets in the way of other, valid, valuable planning, such as planning for long-term care costs.
Starting in 2023, a person can gift $17,000 a year to an unlimited number of people without reducing the person’s lifetime exemption against gift and estate tax, which for 2023 will be $12,920,000. For a married couple, these figures can effectively be doubled ($34,000 and $25,840,000).
What this means is that Mrs. Smith, who has an estate worth $700,000, can gift $17,000 to each of her four children without reducing her $12,920,000 lifetime exclusion against gift and estate tax. Since Mrs. Smith’s assets are worth $700,000 and $700,000 is much less than $12,920,000, Mrs. Smith would never incur gift or estate tax even if she gifted all of her assets.
If Mrs. Smith gifted $20,000 to one of her four children, then she would reduce her lifetime exemption from $12,920,000 to $12,917,000, but there would be no tax owed, only a reduction in her lifetime exclusion, which is not relevant given the fact that Mrs. Smith will never own assets with a value greater than $12,917,000.
The recipient of a gift—Mrs. Smith’s four children, even the child who received the $20,000 gift—never pays gift tax. Only Mrs. Smith has the potential to pay gift tax, but if her estate isn’t above $12,920,000, she never has even the potential of paying gift or estate tax.
You should not let gift or estate tax get in the way of planning for long-term care. For the vast majority of people, gift and estate tax is a non-issue.
Giving money away may seem simple, but gifts can affect taxes, Medicaid eligibility, inheritances, and family expectations in ways people rarely anticipate. A little planning today can help prevent unintended consequences tomorrow.