Life care planning: As holidays approach, play Santa Claus with excess cash

Sandra W. Reed
Sandra Reed

Jacob and Rebecca Roberts, who are in their mid-seventies, have a combined annual income of $150,000. Since they have no home mortgage and their automobiles are paid for, most years they live comfortably on $80,000. This year with no travel expense due to the restrictions of COVID, they have spent even less than that.

The Roberts have sufficient savings to take care of their needs, including enough should they need long-term care. They are considering making gifts of the excess $70,000 to their children and grandchildren this year. Can they do that without incurring a gift tax?

The annual gift tax freebie

The Roberts can give away the $70,000 if they do so within the gift tax exemption rules, which allow an individual to give up to $15,000 to any one person without incurring tax. Jacob and Rebecca have two grown children: a daughter, who is single and a son whose two children are minors. Jacob can give their son and daughter $15,000 each.

Rebecca can do the same, making their total for the children $60,000. Rebecca can give $2,500 apiece to the grandchildren. Jacob can follow suit to make the total $70,000 they want to gift. Since the children are minors, the Roberts should place this money in a custodial account under the Texas Uniform Transfer to Minors Act. They can name their son or themselves as the custodian of the account. If they prefer to avoid a custodial account, they could gift their daughter-in-law the $10,000.

If the Roberts want to repeat the gifting program next year, they can do so. The exclusion remains at $15,000 for 2021.The gifts don’t have to be made in one lump sum. They could make gifts throughout the year. And they don’t have to restrict the gifts to family. They can each give up to $15,000 to an unlimited number of persons, inside or outside the family. The holiday season is a great time to think about playing Santa in utilizing this exemption.

Annual gifting as Medicaid planning

The Roberts are not concerned with qualifying for Medicaid for long-term care, but seniors who might have that need in the future may want to consider an annual gifting program to reduce assets that would disqualify them from Medicaid. Medicaid imposes a penalty for gifts made during the five years prior to applying for Medicaid. Gifts made before the five-year period create no penalty. Those considering this planning tool should consult an attorney with expertise in the area to determine if this option is a good one for them.

Sandra W. Reed practices Elder Law in Somervell County, handling probating of estates, drafting of wills, trusts, powers of attorney and deeds as well as estate and Medicaid planning.  She lives in beautiful Chalk Mountain. She can be reached at (254) 797-0211; (817) 946-2809 or by at sreed@kattenbenson.com.