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Clients and people that attend our estate planning presentations during our tours around Southern Indiana often ask whether they can give money to their family members. A common version of the question is, “Is it true that I can give $10,000 (or slightly larger value) to my family each year?” For most people, the answer is, “Yes, but it depends on your wealth level and whether you will end up in a nursing home in the next five years.” We wish we could give a simpler answer to the question, but the most complete answer requires us to explain federal gift tax law and Indiana Medicaid law.
A typical gift question like the example at the beginning of this article usually relates to nursing home care or Medicaid benefits, but it signals to us that the inquirer has heard someone speaking about an annual gift limit. This article explains the probable folklore source of the annual gift limit idea, the related laws to that concept, and an actual Indiana gift limit concerning nursing home care and Medicaid benefits.
The annual gift limit that most people think about is actually part of the federal gift tax system. The gift tax system is one of three parts of a federal transfer tax system designed to impose and collect taxes from people with more wealth than $5.45 million (an inflation-adjusted exemption value that will rise with inflation in the future). We usually explain the three taxes this way (we sometimes refer to them as the “triplet sister” transfer taxes):
- Congress established the modern estate tax in 1916 to tax beneficiaries of wealth that they inherit from deceased people. The current federal estate tax exemption is $5.45 million.
- Congress established the gift tax in 1932 to keep wealthy people from avoiding the estate tax by giving away their wealth during their lifetimes. However, Congress gave wealthy people a break by excluding a small annual gift to each of an unlimited number of beneficiaries from gift taxation and the obligation to file gift tax returns. The gift tax exclusion amount was $10,000 from 1981 through 2001, $11,000 from 2002 through 2005, $12,000 from 2006 through 2008, $13,000 from 2009 through 2012, and then it was adjusted for inflation thereafter, which has allowed the exclusion to rise to 14,000 from and after 2013. The gift tax on gifts in excess of the annual exclusion is subject to a gift tax exemption that is currently $5.45 million. We believe that the questions that people ask about annual gift limits relate to the annual gift tax exclusion that really does not apply to anyone with wealth significantly below the $5.45 million level, and is therefore not relevant to most people.
- Congress established the generation-skipping transfer tax in 1976 to prevent wealthy people from skipping a generation of inheritance to save transfer taxes in every other generation. The current generation-skipping transfer tax exemption is $5.45 million.
One of the most important things for Indiana residents with significantly less wealth than $4.5 million to know about gifts is that there is no real restriction on their ability to make gifts under federal law or Indiana law. However, it is also important for people to know that if they make gifts within 5 years of requiring nursing home care, the gifts will temporarily disqualify them for Medicaid benefits that they may need to help pay for nursing home care, which costs an average of $6,078 per month in Indiana in 2016. The Indiana Medicaid rules provide a de minimis gift exemption if the total value of all of a Medicaid applicant’s gifts does not exceed $1.200 per year, but that is a very small exemption. More information is available about gifts in these Hawkins Law blog articles: https://hawkinselderlaw.com/gift-legends-myths-about-nursing-homes-medicaid-taxes/, https://hawkinselderlaw.com/myths-and-misconceptions-about-medicare-and-indiana-medicaid/, https://hawkinselderlaw.com/attention-veterans-avoid-va-pensionmedicaid-eligibility-traps/, and https://hawkinselderlaw.com/happy-paper-trails-good-reasons-to-stop-using-cash/.
Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator, a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation; a member of the Illinois State Bar Association and the Indiana Association of Mediators; and he was the 2014-15 President of the Indiana State Bar Association.
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