Dear Attorney Tully: I am a recently retired senior. It seems funny to call myself a senior, but I guess I am. My girlfriend and I had a discussion recently over coffee. She said I can’t make gifts to my children because the state could come after it for 5 years! I thought I could give my two children $10,000 tax free gifts every year. My friend said to ask you to see who is right.
ANSWER: You are both right. You can make gifts tax free up to now $13,000-per person per year, but if you need care within 5 years after the gift and you apply for Medicaid (T19), the State of Connecticut will require you to get the money back.
Your question brings to light another issue recently in the news; the ability to control money after it is gifted. You may have read about the UCONN donor, Richard G. Burton, who made large donations to the University of Connecticut athletic department and now wants the money back.
Whether Burton gets the gift back may be an issue for a court to decide, but in most cases a gift is a completed transfer and you lose control of the asset.
In order for a donation to qualify as a gift under the IRS code, the donor must give up control. The point is I see a lot of parents who want to make tax free “gifts” to their children, but want to control the money. You can’t have it both ways. Gifting assets to your children can do more than help your descendants get a good start in life; it can also reduce the size of your estate and the tax that will be due upon your death.
Perhaps the simplest approach to gifting is to give the child an outright gift. You may give each child up to $13,000 a year without having to report the gifts. If you’re married, both you and your spouse can make such gifts. For example, a married couple with four children may give away up to $104,000 a year with no gift-tax implications. (This year)
Note, however, that your gifting could impact your eligibility for Medicaid (Title 19). In addition, the gifts will not count as taxable income to your children, although the earnings on the gifts, if they are invested, will be taxed.
But you may have some misgivings about making outright gifts to your children. There is no guarantee that the money will be used in the way you may have wished. Money that you hoped would be saved for educational expenses may instead be spent on a fact-finding mission to Fort Lauderdale, Florida. Fortunately, there are a number of options to protect against misuse of the funds by children.