For answers to Medicaid questions including Medicaid benefits, qualifying for Medicaid and applying for Medicaid, please see below.
Q. What gifts can I make without having to pay gift taxes?
A. Every year, you can give any person you want as much as $14,000 without any gift tax consequences. This dollar amount is known as the annual exclusion, and it is now indexed for inflation. It will be increasing from time to time in $1,000 increments.
If you are married, the amount you can give to each person doubles to $28,000 since the person receiving the gift can receive $14,000 from each spouse. Gifts can be in the form of cash, stocks, bonds, real estate, or anything else of value. Buying real estate or bonds in the names of one or more other persons is the same as making a gift of that property to them. The value of the gift would be the amount of money you spent to buy the property or the bond.
You can also make tuition payments for any person you choose, and these payments do not count toward the $14,000 annual limit. Payments you make for medical expenses don’t count against the $14,000 limit either. However, if you make a tuition or medical payment, be sure to pay the school, hospital or doctor directly, as a check made payable to a person which is used for tuition or medical care counts towards the $14,000 annual limit.
If you want to give more than $14,000 to any one person, to the extent your gifts exceed $14,000, you will use up a portion of your $5,340,000 lifetime exemption. This is the amount each person can give away without having to pay gift or estate taxes. By way of example, if you give one of your children $45,000 this year, you can exclude the first $14,000 under the annual exclusion, and the other $31,000 will leave you with a remaining lifetime exemption of $5,308,000.
Keep in mind that if the gifts to any person exceed $14,000 during a single calendar year, you will be required to file a gift tax return by April 15th of the following year to report the gift. That is how the IRS keeps track of how much of your $5,340,000 lifetime exemption is still available. Once you have given away more than the $5,340,000 lifetime limit, you must start paying gift taxes. The estate and gift tax rate is presently 40%.
Before making large gifts, it is often a good idea to talk to an estate planning attorney. Once gifts are made, you can’t go back and do things a better way. For instance, if you are planning to make really large gifts, then it may be wise to create trusts for the benefit of your children. There are a number of important advantages to creating trusts, with few downsides.
Q. What are 529 accounts, and are they really as good as everyone seems to think?
A. Yes, 529 accounts may be that good. In fact, they may be one of the best ways-and many people think they are the best way-to save for a child’s education.
You have a number of options when it comes to saving for college. There are Uniform Transfers to Minors Accounts, education IRAs, and prepaid tuition plans, to name a few. All the options have their advantages, yet 529 accounts seem to combine the best features of all of them to make a fairly good investment vehicle.
The main advantage is that the earnings and most withdrawals are income tax free. Even though you must use after-tax money to create the accounts, all capital gains, dividends, and interest are generally tax free. Withdrawals are subject to income taxes only when they are not used for tuition, room, board, and other authorized expenses.
Another advantage is that gifts to a 529 account not only qualify for the $14,000 annual gift tax exclusion, but you can even make five years worth of gifts today and elect to treat them as being made equally over a five year period. In other words, if a married couple with four grandchildren can give as much as $140,000 to each grandchild right now, for a total of $560,000 to the four grandchildren. Each grandchild will be treated as receiving $28,000 per year for five years.
As far as estate taxes are concerned, all amounts you contribute to the account will be excluded from your estate even though you are the person controlling the account. However, you should note that if you elect to spread your contributions over five years for gift tax purposes, and you die within that five year period, a portion of the gift will be included in your gross estate.
You can also designate a successor to yourself to control the account should you die before a grandchild goes to college.
There are a few downsides worth noting. Unlike some of the other alternatives available for saving for college, 529 accounts don’t let you choose the investments yourself. All you can pick is the type of investment portfolio the account will maintain. Also, if you use funds in the account for non-qualified purposes, a 10% penalty will apply to the portion of the withdrawal which constitutes investment gains. Importantly, as well, some of the tax laws which make 529 accounts so great may expire in 2011 if Congress fails to extend the new tax laws, and other key benefits can always be changed during a future session of Congress.
Overall, 529 accounts present you with an unbeatable combination of features. The accounts offer income tax free growth and withdrawals with no gift taxes, no estate taxes, retained control of the funds, and flexibility in the future should circumstances change.
Call your broker or financial planner for details on how to set up the 529 accounts.
Q. What is a Miller Trust, and how does it work?
A. A Miller Trust is a written trust agreement which makes it possible for people to obtain Medicaid nursing home coverage even though they actually make too much money to qualify for Medicaid. Importantly, they are not actually called Miller Trusts anymore. Instead, they now go by the name Qualified Income Trusts.
The rule in Texas is that you must have both limited resources and limited income in order to qualify for Medicaid coverage. These are two distinct tests that must be met, and if you don’t satisfy both of them, then Medicaid nursing home coverage will not be available.
The first of the two requirements-that you must have limited resources-has nothing to do with Qualified Income Trusts. Basically, if you have more than $2,000 worth of assets, you are too wealthy to qualify for Medicaid no matter how little money you earn.
Cash, stocks, bonds, retirement accounts, non-homestead real estate, and other investments are included in the $2,000 figure, but your homestead (no matter how much it is worth), $2,000 of personal property, a burial plot, a small amount of life insurance, and a car are generally not counted.
People with more than $2,000 can give away properties or convert them into properties which are not counted. However, depending on the date of the transfer, there may be a 36 month or 60 month look-back period. The look back period is a way to keep you from giving away all your property and then applying for Medicaid the next day. For transfers made prior to February 8, 2006, the 36 month look-back period continues to apply unless the transfer was made to a trust, in which case the longer 60 month look-back applies. For transfers on or after February 8, 2006, a 60 month look-back applies to all transfers.
Also, there are rules which generally allow the spouse of someone trying to qualify for Medicaid to retain about $2,931.00 worth of property. A spouse’s property is not counted when determining the total value of assets for the $2,000 resources test.
The second of the two requirements-that you can earn no more than a certain dollar amount of income per month-is where Qualified Income Trusts enter the picture. Under current law, the monthly dollar limit is $2,163. People who earn more can’t qualify for Medicaid unless they have a Qualified Income Trust.
What you do is assign your income to the Qualified Income Trust, and the wording of the trust limits how much of the income can be distributed. This way, a person who makes more than the monthly limit will be treated as earning less than that amount, thereby satisfying the Medicaid income test. The trust can allow for certain payments, including insurance premium payments, other payments to support a spouse, and $60 each month for the beneficiary’s personal needs.
Money remaining in the trust after those payments are made must be paid to the nursing home for the beneficiary’s care, with Medicaid picking up the balance. With Qualified Income Trusts, people can get the government to cover the portion of the nursing home costs that they can’t afford.
Lawyers prepare Qualified Income Trusts. Therefore, everyone who needs one must first meet with a lawyer to discuss the specifics of the trust and all the other planning that goes with it.
To learn more about Qualified Income Trusts, search the internet for the words “Texas qualified income trust.” You can also call the Texas Department of Human Services at 888-834-7406 or visit their website at www.dads.state.tx.us. They have a summary of Qualified Income Trusts, and they also publish a “Medicaid Eligibility Handbook” which contains other helpful information.
Q. Could you explain how stock values are “stepped up” as a result of death? My father has a lot of stocks that he bought decades ago, and I’ll be inheriting them when he dies.
A. Getting a stepped-up cost basis on inherited stock allows you to save taxes when the stock is sold.
For instance, if your father bought a stock at $10 a share, and it is now worth $100 a share, when he sells the stock, he will owe a capital gains tax on the $90 the stock has appreciated. If your father gives you the stock before his death, the gift will be valued at $100 a share, but you will take his cost basis of $10 a share. That means you will owe a capital gains tax when you sell the stock.
If your father waits to give you the stock until after his death, the stock will be valued in his estate at $100 a share, and you will have a new cost basis of $100. Your father’s $10 cost basis gets “stepped-up” to $100 as a result of his death. This is true even if your father’s estate is not required to file a federal estate tax return. When you later sell the stock, you will only owe capital gains if the value of the stock is higher than $100.
If your father is married, rather than leaving the stock to you, your father might leave the stock to his wife (presumably, your mother). In that case, your father and mother would probably own the stock as community property, with each owning one-half of the stock. Upon your father’s death, your mother will not only get a stepped-up cost basis on your father’s one-half of the community property stock, but she will get a stepped-up cost basis in her half of the stock as well. This is a benefit which is generally available only in community property states.
There are two exceptions worth noting. First, after your father’s death, if his estate owes estate taxes, it is possible to value the stock six months following his date of death. If the stock is worth less at that time, you can use this lower value as a way to pay less estate taxes. But if you do, the basis in the stock is also the lower value-not the higher date of death value.
Second, if you own $20,000 worth of stock that you purchased for $1,000 years ago, you may be hesitant to sell the stock because you don’t want to pay capital gains taxes (typically 15% of $19,000, or $2,850). Your idea may be to give the stock to your father, who is very ill and near death, and then have him leave it to you when he dies, thereby getting a stepped-up cost basis. As you might expect, the IRS doesn’t like this, and there is a rule which says if your father dies within one year of being given your stock, then you receive the stock with your old cost basis. If your father makes it more than a year, then you do get the stepped up cost basis.
Q. A relative recently died and left me some stock. How is the tax handled on this transaction? Do I pay the tax when I sell it? Her basis in the stock was very low.
A. When you inherited the stock, you received what is commonly referred to as a stepped-up cost basis. That means your relative’s low basis in the stock is forgotten, and instead, your new basis is the stock’s value on the date of death.
Technically, your cost basis is the average of the stock’s high and low trading prices on the date of death, not the stock’s closing price. If your relative died on a weekend or holiday, then a weighted average of the two nearest open market trading days is used to determine your cost basis. For instance, if your relative died on a Saturday, the average of the high and low trading price on Friday is multiplied by two-thirds, and the Monday high and low average is multiplied by one-third. The two resulting numbers are added together to arrive at the new cost basis.
As a general rule, no taxes are due until you sell the stock unless your relative had a taxable estate, which in 2014 is an estate over $5,340,000. And when you do sell the stock, you will have a short term capital gain or loss if you sell the stock within one year of your relative’s death, or a long term capital gain or loss if you wait longer.
Note: there are several exceptions to the general rules in this answer.
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