Gift tax avoidance

[Allen]

Someone can gift 14k per year. My parent can gift 14k to me and 14k to my spouse.
Can my parent gift 14k to me, 14k to my spouse and 14k to a friend of mine who then gifts 14k to me?

What if they wait a year to do it?

Seems like an obvious loophole, probably plugged, but it thought id ask.

[lakemom]

Don't know about a friend but I believe that each parent can gift you and your spouse 14k each (so 28k each) also they can gift 14k to each of your children then your children could gift it to you.  I would just look it up on the IRS website to make sure that all the rules are followed correctly in order not to incur taxes.

[AH013]

Someone can gift 14k per year. My parent can gift 14k to me and 14k to my spouse.
Can my parent gift 14k to me, 14k to my spouse and 14k to a friend of mine who then gifts 14k to me?

What if they wait a year to do it?

Seems like an obvious loophole, probably plugged, but it thought id ask.

As noted each parent has an individual limit to gift to each person, so you can get 4x the amount by having each parent donate to you & your spouse

Regarding gifts from them to a friend to you, the gift cannot stipulate a further obligation to you, else it is a defacto gift as if it had been given to you directly. Clever arrangements (interest free loan from parent to friend, to be repaid to you in 2 years, etc) also do not hold with the IRS.

That said, your parents could give your friend $28,000 no strings attached and he could give it to you voluntarily and there shouldn't be any tax implications. He could also keep it all and you would have no recourse...

Edit to add:  They can also front load 5 years of gifts if you need the cash now. So they can collectively gift you $70k and your spouse $70k for $140k total as long as no further gifts for the next 5 years.

[lurker]

Someone can gift 14k per year. My parent can gift 14k to me and 14k to my spouse.
Can my parent gift 14k to me, 14k to my spouse and 14k to a friend of mine who then gifts 14k to me?

What if they wait a year to do it?

Seems like an obvious loophole, probably plugged, but it thought id ask.

As noted each parent has an individual limit to gift to each person, so you can get 4x the amount by having each parent donate to you & your spouse

Regarding gifts from them to a friend to you, the gift cannot stipulate a further obligation to you, else it is a defacto gift as if it had been given to you directly. Clever arrangements (interest free loan from parent to friend, to be repaid to you in 2 years, etc) also do not hold with the IRS.

That said, your parents could give your friend $28,000 no strings attached and he could give it to you voluntarily and there shouldn't be any tax implications. He could also keep it all and you would have no recourse...

Edit to add:  They can also front load 5 years of gifts if you need the cash now. So they can collectively gift you $70k and your spouse $70k for $140k total as long as no further gifts for the next 5 years.

Actually, I think the 5-year lump-sum exception only applies to gifts to 529 plans.

[tomsang]

In the past I have seen where parents gave a $1,000,000 loan with the IRS statutory minimum interest rate and then used the gifting to paydown the loan and interest. When you start down that point you should chat with your CPA or attorney. Lots of legal ways to transition wealth without incurring estate taxes.

The other way is to use all or part or the estate exemption now vs. when they pass away. The thought is the money grows outside of their estate.

Lucky position to be in.

[Allen]

I think I have way over thought this.  I thought if the gifts totaled more than $14k per person per year, that taxes were triggered.

I now believe that if you go over that amount, you start into your 'Lifetime exclusion' amount, which is like $5 million.  My Mom only has a total of about $400k in assets.  If that is correct, she can gift it all to me, file a 709 form with the IRS saying she did it (and thus counting against her lifetime exclusion) and still neither of us pay any taxes on it.

WHY?  My Mom is getting dementia, and Medicaid eligibility requires less than $2k of assets in our state.  My plan is to get all the money in my name, pay on her behalf as private pay (as Medicaid has a 5 year lookback period on gifts) and once the 5 year window has expired, she would be eligible for Medicaid.

I don't know if this plan is ethical.  If I have to ask it probably isn't.  Thoughts?

[iris lily]

I think I have way over thought this.  I thought if the gifts totaled more than $14k per person per year, that taxes were triggered.

I now believe that if you go over that amount, you start into your 'Lifetime exclusion' amount, which is like $5 million.  My Mom only has a total of about $400k in assets.  If that is correct, she can gift it all to me, file a 709 form with the IRS saying she did it (and thus counting against her lifetime exclusion) and still neither of us pay any taxes on it.

WHY?  My Mom is getting dementia, and Medicaid eligibility requires less than $2k of assets in our state.  My plan is to get all the money in my name, pay on her behalf as private pay (as Medicaid has a 5 year lookback period on gifts) and once the 5 year window has expired, she would be eligible for Medicaid.

I don't know if this plan is ethical.  If I have to ask it probably isn't.  Thoughts?

Not sure I understand. You say  "pay on her behalf as private pay." That right there will pretty much eat up all of her assets of $400,000 if you figure $70,000 per year times 5 years= $350,000. Yes, nursing homes are $70,000 and up.

But in the big picture, here's how I look at it: if *I* am paying for your mom's nursing home experience through my tax dollars while *you* stash her cash for your FIRE plans, you become FIRE at my expense.

[Allen]

I think I have way over thought this.  I thought if the gifts totaled more than $14k per person per year, that taxes were triggered.

I now believe that if you go over that amount, you start into your 'Lifetime exclusion' amount, which is like $5 million.  My Mom only has a total of about $400k in assets.  If that is correct, she can gift it all to me, file a 709 form with the IRS saying she did it (and thus counting against her lifetime exclusion) and still neither of us pay any taxes on it.

WHY?  My Mom is getting dementia, and Medicaid eligibility requires less than $2k of assets in our state.  My plan is to get all the money in my name, pay on her behalf as private pay (as Medicaid has a 5 year lookback period on gifts) and once the 5 year window has expired, she would be eligible for Medicaid.

I don't know if this plan is ethical.  If I have to ask it probably isn't.  Thoughts?

Not sure I understand. You say  "pay on her behalf as private pay." That right there will pretty much eat up all of her assets of $400,000 if you figure $70,000 per year times 5 years= $350,000. Yes, nursing homes are $70,000 and up.

But in the big picture, here's how I look at it: if *I* am paying for your mom's nursing home experience through my tax dollars while *you* stash her cash for your FIRE plans, you become FIRE at my expense.

The options are she pays her nursing home expense as private pay, or I pay it private pay for 5 years.  Yes, either way it will eat through most of the nest egg.  She also has $3100 of social security and pension income per month.  The actual cost of the group home is about $150/day ($4,500/month) so she has about a $1,500 a month gap.  For 5 years, that is $90,000 or so.  At the end of those five years, I will have spent $90k on her, and then she will qualify for Medicaid to pick up the cost.  If she doesn't gift it to me, she will pay out of pocket until the money is all gone (approximately up to 20 years) and if she is still living, then Medicaid will step in to pay once she is below $2k in total assets.

So yes, this plan means Medicaid (all of us, not just you) pay more and sooner.  However, her desire is the money goes to me and her granddaughter for college - even though it is selfish it is also her wishes.  I just don't want to run afoul of any laws and also want to consider the ethical implications.

[nedwin]

Allen - your proposed plan seems to be ok from my rudimentary understanding of gift tax law and medicaid eligibility.  I think, however, that it would be very beneficial for you and your mother to consult with an attorney that specializes in elder law and medicaid planning.  Their fees to help you accomplish this goal would be money well spent to ensure that your mother's plans are realized.  You don't want to find out in 5 years that something was done incorrectly and she then does not qualify for Medicaid.

As for the ethics of it, this sort of medicaid planning happens every day of the week.  To me its the same as ER people limiting their incomes so that they qualify for subsidies through the ACA.  It may be distasteful to some, but it is legal.

[iris lily]

...As for the ethics of it, this sort of medicaid planning happens every day of the week.  To me its the same as ER people limiting their incomes so that they qualify for subsidies through the ACA.  It may be distasteful to some, but it is legal.

My brother and I were in this exact scenario with our mother's estate of $350,000 ish. Practically the same deal. And we didn't do it, but knew HOW to do it should we WISH to do it.

She (with Alheimer's Disease)  had insurance to pay part of the nursing home tab for 5 years, her income paid some of it, and her 'stache filled in the rest.

This ended well for us, though, because after years 5 when the insurance ran out, her 'stache picked up the tab for a year and then, she died. HEr financial worth at her death was enough to leave us $60,000 each. That's a  nice chunk of change but not FIRE worthy by any means.

All of that said, I am retiring next year and will be structuring my income to take maximum advantage of ACA subsidies. :)

[iris lily]

...It may be distasteful to some, but it is legal.

It also assumes that in 5 years the look-back period is 5 years. By the year 2019, the look back period might be 8 years, 10 years.

And at the time I was researching this issue (it was nearly 10 years ago) I learned that the state of Michigan just didn't bother to even exercise their "look back" prerogative, no one had to transfer wealth because the state never came after it.  So Michigan was (still is?) an option for nursing home care for moms, to put a economic point on it.

[nordlead]

My understanding, is that if she gifts you with the intention of you paying for a service for her then it isn't a gift, and might run afoul of the IRS.

[Spork]

I think I have way over thought this.  I thought if the gifts totaled more than $14k per person per year, that taxes were triggered.

I now believe that if you go over that amount, you start into your 'Lifetime exclusion' amount, which is like $5 million.  My Mom only has a total of about $400k in assets.  If that is correct, she can gift it all to me, file a 709 form with the IRS saying she did it (and thus counting against her lifetime exclusion) and still neither of us pay any taxes on it.

WHY?  My Mom is getting dementia, and Medicaid eligibility requires less than $2k of assets in our state.  My plan is to get all the money in my name, pay on her behalf as private pay (as Medicaid has a 5 year lookback period on gifts) and once the 5 year window has expired, she would be eligible for Medicaid.

I don't know if this plan is ethical.  If I have to ask it probably isn't.  Thoughts?

My understanding (outdated a few years and will probably vary state-to-state, etc) is this:  Sure, you can do that.  But the types of facilities you're going to end up with when you do this is NOT where you're going to want to put your Mom. 

The better facilities have waiting lists and probably won't qualify. 

And:  sorry to hear about your mom.  I've been there.  You're in a situation where there are not any good answers.  But I suspect it's better to just use her stache as is and spend it down.  Use whatever insurance/medicare/etc you have available and just fund the rest.  I suspect you'll get better care. [ And sadly: even the better care facilities can be... not what you really want. ]

[Allen]

Spork, this is a very good point.  We haven't evaluated facilities yet, but the other folks I've talked to in this situation have basically said "the places that take Medicaid smell and the staff are rude" and they put their parents in private pay institutions anyway.  I endorse that route anyway, so the whole thing may be moot.  I just need to understand so I can help her understand her options.

I am going to be consulting an elder care attorney with her.

Thanks everyone for the help.

[iris lily]

I think I have way over thought this.  I thought if the gifts totaled more than $14k per person per year, that taxes were triggered.

I now believe that if you go over that amount, you start into your 'Lifetime exclusion' amount, which is like $5 million.  My Mom only has a total of about $400k in assets.  If that is correct, she can gift it all to me, file a 709 form with the IRS saying she did it (and thus counting against her lifetime exclusion) and still neither of us pay any taxes on it.

WHY?  My Mom is getting dementia, and Medicaid eligibility requires less than $2k of assets in our state.  My plan is to get all the money in my name, pay on her behalf as private pay (as Medicaid has a 5 year lookback period on gifts) and once the 5 year window has expired, she would be eligible for Medicaid.

I don't know if this plan is ethical.  If I have to ask it probably isn't.  Thoughts?

My understanding (outdated a few years and will probably vary state-to-state, etc) is this:  Sure, you can do that.  But the types of facilities you're going to end up with when you do this is NOT where you're going to want to put your Mom. 

The better facilities have waiting lists and probably won't qualify. 

And:  sorry to hear about your mom.  I've been there.  You're in a situation where there are not any good answers.  But I suspect it's better to just use her stache as is and spend it down.  Use whatever insurance/medicare/etc you have available and just fund the rest.  I suspect you'll get better care. [ And sadly: even the better care facilities can be... not what you really want. ]

This is a very important point: Medicare beds in nursing home facilities are hard to find. That's why it's good to start out as private pay at least.

We were actually very happy with the nursing home in central Iowa where my mother was placed. My brother and his wife, both in the healthcare profession, looked around and chose it based on reputation. I always thought it was a decent place. They did not treat their Medicaid patients any differently from private pay, it's just that private pay people got a single room and others shared.

[Spork]

Spork, this is a very good point.  We haven't evaluated facilities yet, but the other folks I've talked to in this situation have basically said "the places that take Medicaid smell and the staff are rude" and they put their parents in private pay institutions anyway.  I endorse that route anyway, so the whole thing may be moot.  I just need to understand so I can help her understand her options.

I am going to be consulting an elder care attorney with her.

Thanks everyone for the help.

That sounds like a solid start.  You will probably need, minimally, some sort of power of attorney.  I think it is possible to control the funds while they are still "hers" (i.e., without any gifting going on).  The attorney seems like the way to find out your real options.

[NCGal]

Be aware some attorneys may discuss a Medicaid Trust as a way of shielding money. The ones in FL wanted to charge us over $18,000 to set up for my mom and aunt - we thought my mom would never need Medicaid and she didn't. We took our chances with the 5 year look back with my aunt. She's currently in NC with about 3 years living expenses left and then we need to figure out how she might qualify for Medicaid. It may not be here since her social security may put her over. But I got some information from a wonderful staff person at the Dept of Aging here who sent me a list of nursing homes that accept Medicaid. She said some of them are exceptionally good and the public does not generally know they take it.

I don't know your age, but if your father was a vet of WWII she can apply for VA Aid and Attendance. It's separate from the regular VA benefits based on disability and is available to spouses of those who served X months (I believe 6 months) in certain wars. This program is based on expenses, not assets, although generally they don't want to see a lot in the bank. They wont' tell you an exact maximum but we were generally coached about her not having more than $30K. But you do have to prove she has caregiver, assisted living, nursing home or other costs that substantiate needing the funds. It took almost 2 years to get it.

[Nords]

WHY?  My Mom is getting dementia, and Medicaid eligibility requires less than $2k of assets in our state.  My plan is to get all the money in my name, pay on her behalf as private pay (as Medicaid has a 5 year lookback period on gifts) and once the 5 year window has expired, she would be eligible for Medicaid.

I don't know if this plan is ethical.  If I have to ask it probably isn't.  Thoughts?

If you're doing this to exploit government loopholes and screw the rest of us taxpayers then yeah, it's probably not ethical.

But look at it from another perspective:  what would your mother want you to do?  That's ethical.  She probably feels that it's the only way she'll ever get any benefit from the rest of her FICA.

I'm my father's conservator.  I do not expect his Alzheimer's to outlive his assets.  I also don't need any of his money.

However I know that my brother would benefit from getting some of Dad's inheritance now rather than later... especially if we ohana Nords have the same genes as our father and his father.  I don't know the family financial facts any better than I know my ancestor's Alzheimer's genes, but I suspect that Dad was making sure that my brother got some financial assistance during the years before Alzheimer's pushed Dad's cognition off the cliff.  Dad even gifted me a few years in the 1990s (before my spouse and I reached FI) so I'm pretty confident that he'd agree to gifting now rather than bequeathing later.

So last year I told the probate court that Dad was going to start gifting us sons each year.  They noted that expenses exceeded income yet assets appeared to be sufficient to handle the drain.  They also pointed out that Medicaid would invoke the five-year lookback on gifting.  Then they approved my conservator's plan-- so now I have official government approval to screw the rest of us taxpayers. 

My spouse and I decided that it's best for family harmony for Dad to gift my brother and me in equal amounts (as documented on my annual conservator's report).  I'm investing my "Dad gifts" in a separate account (in only my name) with my brother as beneficiary.  When Dad's assets get to the Medicaid stage then I'll start gifting him back the money that he gifted me.  That should get him through the five-year Medicaid lookback.  My brother is free to contribute to this plan if he wants, but I'd advise him that it's not necessary.

This planning is probably overly conservative, but I fear that I need a long-term plan.  I wish there was a better way to predict Alzheimer's longevity.  My grandfather was in a full-care facility for 14 years, and his spouse had probably been covering up his cognitive deficiencies for at least five years before her death.  He finally passed at nearly age 98 from pneumonia.