The Clements & Wallace Ultimate Gift Guide

As the holiday season is in full swing, we thought we would join in on the latest trend taking the Internet by storm: gift guides. However, rather than tell you which brand of legal pads are the best shade of yellow, what pen to sign a document with (bold and blue is the correct answer), or what weight of paper is perfect for your new trust agreement, our gift guide won’t tell you what to give, but everything you need to know about giving the gift itself.

What constitutes a gift? Can giving gifts have negative legal or financial consequences? Who can give gifts, and who can receive them? Read on to find out.

What is a Gift?

When most people hear “gift,” images of envelopes and boxes tied with ribbon come to mind. However, what constitutes a gift is quite a bit broader than that. Legally speaking, a gift is a voluntary transfer of a property interest from one person (individual or entity) to another without the receipt of any consideration (a benefit or detriment) in return.

This broad definition means that, legally speaking, more transactions constitute “gifts” than you might think. Or the inverse may be true: some transactions that seem like gifts may not technically meet the definition.

Here’s an example: Alice is a mother who lives with her grown son, Bill, and his family. Bill and his family do not charge Alice rent, nor have they ever asked her to contribute to any household expenses. However, when the home’s air conditioning system needs replacing, Alice personally covers the costs of the new system and installation. Alice does so in part because Bill’s birthday is coming up, and she wanted to give the family a nice gift to celebrate. Was Alice’s purchase of a new air conditioning system a gift?

The short answer is: it depends. If Alice purchased the system as a way of “making up” for the months of rent her son never asked of her, it might be argued that the air conditioner was provided in consideration of Bill’s allowing Alice to stay with the family. In that case, the air conditioner would not be a gift because the transferor (Alice, the giver) gave the unit in exchange for a legal detriment from Bill, who has less space in his home and increased household expenses due to his mother’s presence. The same would be true if Bill paid Alice back for the full value of the installation.

However, if Alice purchased the air conditioning unit with no intent of receiving anything in return, or if she paid Bill back rent in addition to paying for the new unit, then Alice’s purchase of the air conditioner could be construed as a gift to Bill and his family. Determining whether a transaction was a gift oftentimes requires a careful analysis of the facts.

Considerations in Giving Gifts

Whether a transaction is considered a gift can at times have crucial legal and financial consequences, and as such, some transferors (the gift-giver) may need to consider the potential effects their gift may have on themselves and on the recipient.

Medicaid & Public Benefits

Medicaid (or other public benefits) are an extraordinarily important consideration when giving or receiving gifts.  Individuals seeking or receiving certain Medicaid benefits, such as the Institutional Care Program, are limited as to the amount of income and assets-on-hand that they may own in order to qualify for or continue to receive benefits. Giving gifts and receiving gifts can be detrimental to current or prospective Medicaid beneficiaries for different reasons.

Giving gifts can create a potentially insurmountable hurdle for those applying for Medicaid Institutional Care Program or similar benefits. As part of the application process, the Department of Children and Families, which administers Medicaid in Florida, will review an applicant’s financial records going back five years. You may hear this policy referred to as the Medicaid “look-back” period. If an applicant gave gifts—typically transfers of cash, but it could be anything that has value—during that five-year period (other than to certain exempt recipients), the applicant may be penalized and lose their benefits for a number of months or even years, depending on the amount of the gifts or gifts, despite being otherwise qualified for the program.

Receiving gifts can have a similar effect on those who have already qualified for Medicaid benefits. If someone receiving Medicaid or similar means-based public benefits receives a gift and that newly acquired asset is accepted and retained by the beneficiary, it may push that individual over the asset limit and render them unqualified for benefits for at least the month those benefits were received and maybe much longer.

If you have a loved one who is currently receiving public benefits or may qualify for benefits in the future, and you want to give that individual a gift, you may consider the use of a Special Needs Trust to provide for the beneficiary’s extra needs while maintaining their eligibility for benefits. You should also ensure that your estate planning documents, particularly your Last Will and Testament or Revocable Living Trust take public benefits eligibility into consideration for your beneficiaries.

Taxes

Tax issues are another consideration when considering a gift. As of the publishing of this post in December 2022, federal tax law provides that you may gift up to $16,000.00 in cash or assets to any individual person or entity without needing to file a gift tax return. Gift tax returns (IRS Form 709) must be filed to inform the IRS of gifts.

Filing a gift tax return, however, does not mean that you must immediately pay taxes on the gift. Rather, that amount which exceeds the annual exclusion amount (per person) goes against your lifetime exemption, currently $12.06 million. The lifetime exemption represents the value of gifts you can make over the course of your lifetime and at your death without paying any taxes on those gifts (these taxes are often referred to as “estate taxes”). The lifetime exemption is adjusted annually.

Another tax issue to be mindful of is basis. “Basis” refers to the value of an asset at the time it was gifted or sold. When gifts are given during lifetime, the recipient’s tax basis is set at the value of the asset at the time the giver acquired it. Put another way, the giver’s basis carries over to the recipient. However, when a recipient receives a testamentary gift (i.e., an inheritance), the basis is adjusted to match the value of the asset at the giver’s date of death. This is typically referred to as a “stepped-up” basis.

To illustrate this, let’s consider a gift of stock. If George gives his granddaughter Roberta 100 shares of Company, Inc. stock as a college graduation gift, George’s basis will carry over to Roberta. When Roberta sells that stock ten years later, the basis for her assessment of capital gains taxes will be based on the value of the stock on the day George acquired it.  If the stock’s value at the time of sale is more than George’s basis, Roberta will taxes, but will receive the gift sooner, during George’s lifetime. On the other hand, if George leaves Roberta that same stock in his Last Will and Testament, then Roberta’s basis for capital gains taxes when she sells the stock will be based on the value of the stock on George’s date of death, meaning that if she sells fairly soon after George’s death, she will pay minimal taxes.

Methods for Giving Gifts

We usually associate the idea of giving gifts with colorful wrapped boxes and ribbon. While this works for physical gifts (typically of lower value), if you want to give gifts of cash, large assets, or place conditions on gifts, or the intended recipient cannot accept gifts outright, you may wish to employ various legal vehicles which allow you to securely transfer those assets and ensure that the recipient benefits from the gift to the greatest extent possible.

Testamentary Gifts

Testamentary gifts are gifts devised to a specific beneficiary (or class of beneficiaries) in a Last Will and Testament. Property devised via your Will remains yours until you die and transfers to your beneficiaries after your Will is admitted to probate.

Wills can be a powerful method for giving gifts, largely due to their flexibility. Wills can devise gifts outright to beneficiaries, create trusts, give gifts to minors under the Transfers to Minors Act, or direct that money or assets be given to an existing trust or other entity. Furthermore, beneficiaries receiving testamentary gifts do not have to pay any taxes on those gifts.

Drafting an effective Will often requires an understanding of common law, statutory law, tax law, state and federal needs-based benefit programs, and case law precedent, in addition to knowledge regarding the formalities of execution of the document required by Florida law. Whether you want to craft a new Will or revise an existing one, you should be sure to protect your estate and its beneficiaries by consulting a Certified Elder Law Attorney with experience in estate planning.

Trusts

Trusts are another powerful way to give gifts and, like Wills, offer a great deal of flexibility in giving. Well-drafted trusts permit the grantor (the one giving the gift) to set conditions on how assets are controlled and managed, when they are distributed, the amount distributed, and to whom they are distributed. Numerous types of trust are recognized under Florida law.

If the intended recipient of your gift receives needs-based benefits, such as Medicaid, you should consider giving your gift by way of a Special Needs Trust (SNT).  SNTs are federally defined trusts that allow for beneficiaries to apply for and continue to receive Medicaid benefits (assuming the beneficiary would otherwise qualify) while also enjoying the benefits of the asses in the SNT.

Trusts can also be useful if you are concerned that your intended beneficiary may not handle cash or assets responsibly. Placing assets in the care of a trustee allows your beneficiary to get the benefits of the assets in accordance with guidelines and requirements that you establish, while at the same time preventing that beneficiary from handling and potentially mismanaging assets. Some trusts periodically pay an allowance to beneficiaries; others require the trustee to make direct payments to third parties for the benefit of the beneficiaries, such as paying for education or medical bills.

Like Wills, trust documents must be carefully drafted to adhere to existing law and, oftentimes, to make contingencies for future changes in law or circumstances.

Gifts to Minors

Most gifts given to minors are of relatively small value. However, it’s not uncommon for parents, grandparents, or other family members to want to make much more substantial gifts, particularly to teenagers.

If you want to make a gift to a minor, but do not need the complexity of a trust, the Florida Transfers to Minors Act may be a viable option. The Transfers to Minors Act allows givers to give gifts of cash or assets to a minor through an intermediary called a custodian. The custodian of the property safeguards and manages the assets and can, in their discretion, make purchases on behalf of the minor. The minor receives control of the property outright once they turn 18, 21, or 25 years of age, depending on the giver’s intent and other circumstances.

The Transfers to Minors Act can be used for gifts made during the giver’s lifetime or for gifts the minor receives through the giver’s Last Will and Testament or Revocable Living Trust.   What you can do with the Transfers to Minors Act is controlled entirely by statute, so to ensure that your intentions are met, you should consult an attorney.

College Savings Plans & ABLE Accounts

Another popular vehicle for giving gifts is through special savings accounts which are created by federal and state law. These accounts are created for specific purposes, and limits or other guidelines may be placed on both deposits and expenditures by federal or state law. Two common examples of these accounts are college savings plans and ABLE accounts.

College savings plans, often referred to as “529 accounts” (because they are authorized by Section 529 of the federal Internal Revenue Code), allow family members or students to save and invest funds for use towards qualified higher education expenses. Withdrawals made from these accounts for qualified expenses do not require capital gains taxes to be paid on the withdrawn funds, which gives them an edge over a traditional trust, which may have to pay taxes on any investment gains. These plans can also help maximize a student’s qualification for needs-based financial aid because, if the account is established by parents, the assets in the account are assigned to the parents rather than the student themselves and, in addition, the amount which can be considered ‘assets’ is capped at a set percentage.

Another federally created savings plan that might be considered is the use of an Achieving Better Life Experience (ABLE) account. ABLE accounts allow individuals who qualify to receive Social Security Disability (SSDI) or Supplemental Security Income (SSI) benefits to save additional funds to be put toward certain qualified expenses, with little or no effect on SSD, SSI, or Medicaid eligibility. The statutes and regulations controlling ABLE accounts are particularly complex, so be sure to consult a Certified Elder Law Attorney if you believe that the intended recipient of your gift may qualify for such an account.

Consult a Certified Elder Law Attorney Before Gifting

Gifts can be one of the great pleasures of life, for both the giver and receiver. However, if you are planning to give a substantial gift or your recipient may qualify for government benefits (or if you expect to receive a gift and are currently receiving needs-based benefits or may in the near future), you should consult a Certified Elder Law Attorney prior to making the gift. The Certified Elder Law Attorneys at the Elder Law Firm of Clements & Wallace, PL, can help you navigate the complexity of modern law and maximize the benefit your loved one will receive from your gift.