Q. My grandmother is really excited about Christmas this year. In the spirit of the season, she is considering making a truly meaningful gift of $5,000 to the local animal shelter, and giving another $5,000 to her church. She also told me that she will be giving my husband and me $2,000 for a backyard swing-set for our children, and my sister $2,000 to put towards her bathroom renovation. Although it's extremely generous of her, I am getting a little nervous about the sizeable charitable contributions she is considering and the gifts to my sister and me, because there is a strong possibility that she will need Medicaid in less than 5 years. Can she be disqualified because of her Christmas gifts and charitable giving?

A. It is nice to hear that your grandmother is a generous person who wants to help you and your sister with such nice Christmas gifts, and give to her church and the local animal shelter. However, when it comes to Medicaid eligibility, your grandmother would likely be penalized for her generosity.

Why? Gift giving can be a risky venture for people who may need Medicaid coverage within five years. This is because Medicaid presumes that all gifts made in the 5 years prior to filing for Medicaid were made in contemplation of applying for Medicaid. Individuals seeking eligibility for long-term care Medicaid benefits must disclose all gifts (whether these are charitable donations or gifts made to friends or family members) made by the individual or his or her spouse within the prior 5 years. Medicaid presumes that gifts made within 5 years of the eligibility request date were made in order to qualify for benefits.

If someone has a history of giving small weekly or monthly gifts to a charity, most Medicaid offices will not construe those to be disqualifying gifts. For instance, in Virginia, these types of regular gifts are not penalized so long as they are under $4,000 per year and there was a regular pattern of making this gift for years prior to applying for Medicaid. But a sizeable one-time gift such as the ones you have mentioned will be penalized.

Does this potential risk of a Medicaid penalty suggest that all giving should cease? Not necessarily. However, those who may need nursing home care within the next five to ten years must weigh the joy of giving against the potential cost of losing much-needed Medicaid benefits.

 For more information about gifting and Medicaid eligibility, read “Medicaid: The Perils of Gifting FAQ” on our website.

 Q. Also, I noticed you sent out the new key elder law numbers last week, but I did not see anything about gift and estate tax exclusion amounts for 2016. What are the new gift and estate tax exclusion numbers for 2016, and how do they compare to the current ones? If we do start making gifts, should we update our estate planning and, if so, how often?

 A. For 2016, the estate and gift tax exemption is $5.45 million per individual, up from $5.43 million in 2015. That means an individual can leave $5.45 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield $10.9 million from federal estate and gift taxes.

How does this compare to previous years? Under the provisions of the American Taxpayer Relief Act of 2012, the lifetime gift and estate tax exemption increased from $5,120,000 in 2012 to $5,250,000 in 2013 and the tax rate increased to 40%. In 2014 and future years, the exemption amount continued to be indexed for inflation and the tax rate remained at 40%. The 2014 lifetime gift tax exemption as indexed for inflation was $5,340,000, the 2015 lifetime gift tax exemption is $5,430,000 (an increase of $90,000), and the 2016 lifetime gift tax exemption is $5,450,000 per individual (an increase of $20,000).

In 2015, you can gift up to $14,000 per person, per year, without incurring any federal gift tax. These gifts are referred to as annual exclusion gifts and are not subject to the federal gift tax at all and therefore do not use any of your lifetime exemption from gift or estate taxes. The annual exclusion amount is indexed for inflation but can only increase in $1,000 increments. Therefore, the 2016 annual gift tax exclusion remains at $14,000. However, always beware of making lifetime gifts if you are over the age of 65 — see the example above and read the Medicaid: The Perils of Gifting FAQ webpage on our website for more details.

For spouses, there is an unlimited deduction from estate and gift tax that postpones the tax on assets inherited from each other until the second spouse dies. Married couples can combine their annual exclusion gifts and gift up to $28,000 per person, per year, but “split gifts” must be reported to the IRS on Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return.

The new inflation adjusted numbers are available in Revenue Procedure 2015-53.

With all of the frequent changes that take place in the tax laws, and even more frequent changes in Medicaid rules, I recommend that everyone should revisit their estate plans every year. The Farr Law Firm’s Lifetime Protection Program ensures that your documents are properly reviewed and updated as needed, so that they will have the proper effect under the law.

As always, if you or a loved one is nearing the need for long-term care or already receiving long-term care, or if you have not done Long-Term Care Planning, Estate Planning or Incapacity Planning (or had your Planning documents reviewed in the past several years), please call us to make an appointment for an initial no-cost consultation:

 Fairfax Elder Law Attorney: 703-691-1888
 Fredericksburg Elder Law Attorney: 540-479-1435
 Rockville Elder Law Attorney: 301-519-8041
 DC Elder Law Attorney: 202-587-2797

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