|July 15, 2014|
Previously published on June 24, 2014
This is a statement commonly heard in the estate planning practice. It is an assertion cloaked in unstated assumptions, and the meaning therefore varies. Generally, however, the client making this statement usually has one of two things in mind. First, a surprisingly large number of people seem to think that their assets will escheat to the state if they don’t give them away before death. While some states do have harsher laws on escheat than does Georgia, none, to the author’s knowledge, are so draconian as those clients seem to fear. The other, perhaps more common, meaning of this statement is that the client wants to impoverish himself or herself so as to qualify for Medicaid assistance, generally in the context of nursing home care.
Gifting property involves all sorts of complex considerations, and no exhaustive analysis will be attempted here. Rather, a few basic principles are offered for your consideration.
First, as noted, Georgia’s law on escheat is not nearly so harsh as clients sometime seem to believe. So long as you have legal heirs who will deal with issues of inheritance, escheat is not likely. In any event, the simplest way to deal with concerns of escheat is to make a Will, not to gift away your property!
Secondly, as to Medicaid qualification, giving away all your assets does not automatically qualify you for government financial assistance. There are a variety of different financial assistance programs, each of which have different rules. Qualification tests generally involve both income and asset tests. There are also generally “look-back” periods during which the donor will be disqualified from receiving benefits, and those are much harsher now than they were prior to 2006.
Finally, and perhaps most importantly, a gift may result in the loss of stepped-up basis. Stated very generally, persons who inherit property from a decedent receive a “step-up” in basis to the value of the property at the time of the decedent’s death. For example, if your father bought real estate in 1960 at a price of $20,000.00, and dies at a time when it is valued at $500,000.00, and you inherit that property by virtue of his death, your basis is stepped-up to $500,000.00. Thus, you may sell it for $500,000.00 and pay no income tax, because you have had no gain. On the other hand, if you father gifted that property to you before he died, you would receive his basis. Thus, if you then sold it for $500,000.00, you would have a taxable gain of $480,000.00.
It is important to seek competent, unbiased advice before making any significant gifts. A good doctor will discourage you from undergoing a procedure that is likely to make things worse, and a good lawyer will do likewise.