A problem that often arises when people try to do their own Medicaid planning is ignoring the effect gifts have on taxes. When a person gifts an asset, the tax basis transfers to the person who receives the gift. The best way to demonstrate this is with an example.
Let’s say Mom and Dad bought their home in 1950 for $20,000.00. Now, their home is worth $120,000.00. Mom and Dad pass away owning the house, and their executor sells the house for $120,000.00. No capital gains tax will be owed under the current tax code because of how the IRS treats assets that pass to people upon death.
However, if the parents gift their home to their children, an entirely different tax result occurs. Let’s assume that the children sell the house for $120,000.00. If we forget about any expenses related to the sale for the sake of simplicity, the IRS will say that capital gains taxes are owed on the $100,000.00 profit ($120,000.00 sale price less the $20,000.00 Mom and Dad paid for the house). At a 15% capital gains tax rate, the taxes owed because Mom and Dad gifted the property before death would be $15,000.00. As you can see, the IRS treats the taxes on assets sold, after they have been gifted, much differently than those assets that transfer because of someone passing away.
Finally, let’s consider one more tax trap. Mom and Dad gift their home to their children and continue to live in the house. Six years after making the gift, Mom and Dad move out of the house to independent living, and the house is sold for $120,000.00. Again, capital gains tax would be owed on the $100,000.00 profit. This tax would not have been owed if Mom and Dad had sold the property while it was in their names as the IRS has a capital gains exclusion for the sale of your personal home.
Protect yourself, and your family, from tax situations like this by making sure you have assistance in estate planning.
Additional Information on North Carolina Medicaid Assistance for Nursing Home Care:
Download a free copy of Jackie Bedard’s book, The Ultimate Guide to Paying for Nursing Home Care in North Carolina, to learn the nursing home and Medicaid secrets you need to know to avoid going broke in a nursing home and leaving your family penniless.