Graduation season has arrived! Do you know what you’re giving your college graduate to congratulate them? The advice for giving money to young adults does not hinge on the number of dollars involved. In fact, from $100 to $100 million, and however you slice it, the goal is to ensure responsible use of the funds.
Things To Consider Before Making Your Gift
Medicaid Consequences of Gift Giving: Seniors with less than $1 million should be aware of the Masshealth/ Medicaid consequences. Gifting may cause a problem if you or your spouse need nursing home care within the next five years. When you make a gift within five years of applying for MassHealth Long Term Care benefits, a penalty period may be imposed based upon the amount of the gift you gave. Special gifts such as birthday, wedding, or graduation gifts of $900 or less are not likely to cause a problem for Medicaid/MassHealth qualification. However, gifts over this amount could cause a problem.
IRS Annual Exclusion Amount: As of 2022, the IRS rules state that a person can give away up to $16,000 per year, per person, without owing any tax, also referred to as the “annual exclusion” amount. What happens if you give away more than $16,000 per year? If you give away more than $16,000, you must file a gift tax return with the IRS. An estate tax will be due when a single or widowed person dies in Massachusetts with assets greater than $1 million. Gifting can be an excellent way to reduce a single person’s estate to minimize or avoid estate taxes at the end of your life.
Step up in basis: If you plan to give away an asset that has been appreciated, you should check with an accountant or elder law attorney about the income tax consequences before making the gift. It may be better to hold the asset until your death for assets that have appreciated significantly in value to avoid capital gains taxes. Some appreciated assets may receive a “step-up in basis” upon your death. That means that the IRS will use the asset’s value at the time of your death rather than the actual amount that you paid for the asset when determining capital gains tax.
Gifting an interest in your home: If you are considering gifting an interest in your home, you need to make sure that you understand all the consequences of doing so. This is a big decision, and you should always consult with one of our elder law attorneys before doing so. It would be best to be sure that you fully understand the income tax consequences involved. If you plan on giving an interest in your home to protect it if you need nursing home care in the future, you should talk with an elder law attorney to discuss your best option to ensure that your interests will be protected.
When gifting to your graduate, here are some documents are may discuss at your next estate plan review:
Will: Ensures assets are passed on to designated beneficiaries in accordance with your wishes. In the drafting process, you name an executor, the person or institution that oversees the distribution of your assets. If you have minor children, you need to name a guardian for them.
Letter of Instruction: This may appoint someone who will ensure the proper disposition of your remains. This sounds creepy, but it’s crucial if you choose a method of internment contrary to your family’s tradition.
Power of Attorney: Appoint someone to act as your agent if you are incapacitated. That person can act for you in various circumstances, such as withdrawing money from a bank, responding to a tax inquiry, or making a trade.
Health Care Proxy: Appoint someone to make health care decisions on your behalf if you lose the ability to do so.
Trusts: Revocable (changeable) or irrevocable (not-changeable) trusts may be helpful, depending on your family and tax situations. If an estate is above the federal estate tax exemption, you may want to consider a trust.
Giving your favorite graduate a financial gift is a way to ensure your gift has a lasting effect. The potential to set them up with a lifetime of financial security can be more valuable than cash, a car, or another more traditional gift.
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