There are several planning methods that can be utilized throughout your lifetime to reduce or eliminate taxes upon your death. Gifting is one option to avoid estate taxes. Anyone can gift up to $15,000 per beneficiary in 2020 without having to pay any gift tax (which is combined with the estate tax). Additionally, the Federal Lifetime Gift and Estate Tax Exemption is currently $11.58 million. This means that you can give away up to $11.58 million in assets during your life or after death without incurring estate tax. However, the Federal exemption is scheduled to plummet in 2026, bringing it down to state levels, which we estimate to be around $6 million. Currently, New York’s estate tax exemption is $5.85 million. While New York does not impose a tax on gifts, should you give away assets within three years before your death, New York will count the gift as part of your total estate. This gap between the federal and NYS exemption levels represents an opportunity to gift.
There are important factors to consider before gifting big ticket items. First, once an asset is gifted, all control, rights, and benefits to that asset are lost. Second, many assets, like real property or stock, come with a cost basis, which is the purchase price. If an asset is gifted that was bought for $100,000 and is worth $500,000 on the date of the transfer, the recipient of the gift will take on the $100,000 cost basis and be responsible for any capital gains taxes associated with the asset upon sale; i.e. $400,000 if sold immediately but certainly more if the asset appreciates. This is not ideal since capital gains can total upwards of 30% of the proceeds. If, instead, the asset was left in a will or trust, the beneficiary’s basis would be the fair market value at the time of death and you avoid capital gains altogether.
Another item to consider when making lifetime gifts is how this will affect Medicaid eligibility for long term care in the future. Nursing home Medicaid imposes a lookback on all transfers that occurred within five years of applying for care at a nursing facility. Any gifts made within those 5 years will create a penalty period in which Medicaid will not cover the cost of care. There is also a new 2.5-year lookback for homecare Medicaid, which is slated to become law on October 1, 2020. Without Medicaid coverage, the cost of care is hundreds of dollars per day.
Outright gifting is not always the best option and there are other estate planning tools available that can provide for tax planning, while still protecting assets. An irrevocable trust, for example, moves assets out of the estate but still allows some control over how items are distributed. Retaining the power to substitute assets – thereby trading low basis for high basis assets in the future or at death adds flexibility to consider capital gains. A life insurance trust (ILIT) is a classic vehicle for avoiding estate taxes and controlling the distribution of assets to beneficiaries according to the terms of the trust.
Everyone has different concerns that need to be addressed in his or her estate plan. Therefore, it is important to meet with an Estate Planning and Elder Law attorney who can help weigh all options in order to determine how to best accomplish specific goals, both during lifetime and after death.