Unfortunately, large transfers of cash or assets may trigger federal gift taxes. Depending on the condition of the person who received the gift, it may affect one’s eligibility for Medicaid benefits. In this article, you will discover feasible estate planning strategies for the effective use of gifts in Florida.
How Can Gifts be Used Effectively for Estate Planning in Florida? – Taking a Closer Look
Exploring Tax Exemption Possibilities
It is possible to distribute gifts to one or multiple beneficiaries without paying gift taxes – as long as each beneficiary receives gifts valued less than the annual exclusion limit. In 2021, the exclusion limit was $15,000. Currently, the cap on tax-free gifts is set at $16,000 per person.
As the exclusion “resets” each year, one could distribute gifts up to $15,000 in 2021 and distribute more gifts to the same person up to $15,000 in 2022.
For married couples, each spouse is entitled to the same limit. Hence, married couples can gift assets valued at up to $32,000 to each recipient.
Each taxpayer is also entitled to a lifetime gift tax exemption. The lifetime exemption increased from $11.7 million to $12.06 million in 2022. Considering the annual exclusion limit is part of the tax exemption, each gift exceeding the $15,000 annual limit counts toward the gift tax limit.
Using Trusts to Protect a Beneficiary’s Medicaid Eligibility
To be eligible for nursing home care, in-home, or other similar benefits provided by Medicaid, an elderly person must have limited income and assets. Federal law implemented different mechanisms to prevent candidates from gifting cash or assets to qualify for Medicaid.
One of these mechanisms is the “look-back period,” wherein the agency responsible for Medicaid reviews all the financial transactions performed by applicants. If a transaction violates the period’s rules, the applicant might lose eligibility for the program.
One of the most popular strategies for effectively gifting assets to someone else is designing a trust for that specific purpose. For example, one may create an irrevocable trust to hold assets for his or her heirs while maintaining the trustor’s eligibility for Medicaid benefits.
As the assets held in an irrevocable trust are no longer considered part of the trustor’s estate, these assets do not affect his or her eligibility for Medicaid.
There are different types of Florida trusts available to protect one’s eligibility for Medicaid, including qualified income trusts, pooled trusts, and special needs trusts.
Gifting Through a Family Limited Liability Company (LLC)
It is fundamental to understand that gift tax exclusions apply to cash and non-cash gifts, including personal tangible property like jewelry, books, and antiques.
When taxing tangible property, the IRS applies the asset’s fair market value. If someone gifts an asset priced over the market value, it may surpass the limit and expose the transaction to taxes. Creating a family LLC and transferring the assets to the legal entity is an efficient way to circumvent this issue.
As gifts given to a legal entity do not go directly to heirs, the assets are gifted a reduced market value. With a reduced valuation, these assets do not exceed the threshold established by the federal gift tax.