Many seniors consider transferring assets for estate and long-term care planning purposes- or just to help out children and grandchildren. Gifts and transfers to a trust often make a lot of sense. They can save money in taxes and long-term care expenditures- and they can help out family members in need and serve as expressions of love and affection.
But some gifts can cause problems- for both the generous donor and the recipient. Following are a few questions to ask yourself before writing the check:
- Why are you making the gift? Is it simply an expression of love on a birthday or big event- such as a graduation or wedding? Or is it for tax planning or long-term care planning purposes? If the latter- make sure that there’s really a benefit to the transfer. If the value of your assets totals less than the estate tax threshold in your state- your estate will pay no tax in any case. For federal purposes the threshold is $5.34 million (in 2014). Gifts can also cause up to five years of ineligibility for Medicaid- which you may need to help pay long-term care costs.
- Are you keeping enough money? If you’re making small gifts- you might not need to worry about this question. But before making any large gifts- it makes sense to do some budgeting to make sure that you will not run short of funds for your basic needs- activities you enjoy — whether that’s traveling- taking courses or going out to eat — and emergencies such as the need for care for yourself or to assist someone in financial trouble.
- Is it really a gift (part one)? Are you expecting the money to be paid back or for the recipient to perform some task for you? In either case- make sure that the beneficiary of your generosity is on the same page as you. The best way to do this is in writing- with a promissory note in the case of a loan or an agreement if you have an expectation that certain tasks will be performed.
- Is it really a gift (part two)? Another way a gift may not really be a gift is if you expect the recipient to hold the funds for you (or for someone else- such as a disabled child) or to let you live in or use a house that you have transferred. These are gifts with strings attached- at least in theory. But if you don’t use a trust or- in the case of real estate- a life estate- legally there are no strings attached. Your expectations may not pan out if the recipient doesn’t do what you want or runs into circumstances — bankruptcy- a lawsuit- divorce- illness — that no one anticipated. If the idea is to make the gifts with strings attached- it’s best to attach those strings legally through a trust or life estate.
- Is the gift good for the recipient? If the recipient has special needs- the funds could make her ineligible for various public benefits- such as Medicaid- Supplemental Security Income or subsidized housing. If you make many gifts to the same person- you may help create a dependency that interferes with the recipient learning to stand on his own two feet. If the recipient has issues with drugs or alcohol- he may use the gifted funds to further the habit.
After you’ve answered all of these questions- you may still wish to make a gift. But unless the gift is for a nominal amount- it is advisable to check with your attorney to make sure you are aware of the Medicaid- tax and other possible implications of your generosity.