Cons to Gifting Assets – and Alternatives to Consider

As individuals age, they naturally may wish to gift assets to children or other relatives. The emotional benefits of gifting assets while you’re still alive are clear: you are able to witness your loved ones spending the money, and your beneficiaries receive their inheritance earlier in life, when they might need it more.

However, there are many pitfalls to this well-meaning gesture, that you should fully explore before gifting any assets to relatives. 

‍You’ll Need More Money Than You Think

Aging and long-term care are much more expensive than most Americans believe. As the US Federal Reserve learned in their 2019 Survey of Consumer Finance, the median American ages 65-74 has $426,070 saved for retirement. Given that a semi-private room in a Miami, Florida nursing home costs $108,233 annually (according to Genworth’s cost of care survey), retirement savings won’t go nearly as far as many people expect.

Gifting assets to your children while you’re still alive is undoubtedly tempting. But remember that the greatest gift you can give children is funding your own retirement, and not financially relying on them for long-term care costs. While gifting assets might help them now, they could be put into a precarious situation if they’re then called on to cover costs in the future.

Tax Implications

When you give somebody (other than your spouse) more than $16,000 in a year, you will have to pay a gift tax. Gift tax rates range from 18-40%, and you, as the giver, are responsible for paying the associated taxes. However, inherited assets are tax-free if the estate is under approximately twelve million dollars; your family can save a lot in taxes by delaying the gifting.

Medicaid Eligibility

If you apply for Medicaid long-term care support in the future, Medicaid will look back at your last five years worth of financial transactions. In the five years before applying for Medicaid, an individual cannot gift or transfer assets out of their name, or sell assets for under fair market value. This is to prevent people from giving away all of their assets to family right when they need long-term care, so as to “artificially” appear eligible for Medicaid support. 

Please see Aidaly’s guide to the Medicaid five year lookback period and to spending down assets for Medicaid for more details about eligibility.

Alternatives to Gifting Assets 

If you’re trying to avoid probate: Set up a trust instead

A major incentive to gifting assets while alive is to allow your beneficiaries to avoid probate, a lengthy legal process in which a will is validated before assets are distributed. Instead, look into setting up a trust. When assets are held in a trust, the beneficiaries can skip the probate process after you pass away.

If you’re trying to compensate relatives for care work: Try a personal services agreement 

If a relative has stepped up to provide caregiving support, you may wish to compensate them for their time and energy. Instead of gifting assets as a thanks, look into creating a personal services agreement. This allows you two to create an employment agreement for family caregiving, legitimizing the scope of work and compensation. “As care needs become greater, it is not uncommon for informal family caregivers to quit their jobs to provide the level of care that is needed. Family caregiver contracts provide a win-win situation; the caregiver is able to be compensated for the care [they are] providing and the elderly individual receives the care [they] need,” says the American Council on Aging. 

To learn more about personal services agreements, check out Aidaly’s resource here (insert link once posted) 

If you’re trying to lower income for Medicaid eligibility: Look into Miller Trusts

If your income is too high to receive Medicaid long-term care support, you might think it wise to give a relative your access income. However, that would disqualify you from receiving Medicaid support.

Instead, look into Miller Trusts, also known as Qualified Income Trusts; in Florida, this allows individuals to legally lower their income enough to become Medicaid eligible. As the Florida Department of Children and Family says, “If your income is over the limit to qualify for Medicaid long-term care services (including nursing home care), a Qualified Income Trust (QIT) allows you to become eligible by placing income into an account each month that you need Medicaid.” This allows individuals to lower their incomes enough to become Medicaid eligible.

Check out Aidaly’s guide to Miller Trusts to learn more 

If you’re trying to encourage family fun: Give within the gift tax limits

If you have an abundance of resources, and your desire to gift assets to family comes from a desire to watch your children enjoy their inheritance, make sure annual gifts are under the gift tax limits. According to Nerdwallet, “In 2022, you can give up to $16,000 to someone in a year and generally not have to deal with the IRS about it. In 2023, this threshold is $17,000.” As long as you make sure that annual gifts are below these limits, you will not have to worry about tax implications.

Work with an estate planning attorney 

If you are considering gifting assets to children – or would like to consider alternatives such as a Miller trust – speak to an estate planning attorney in your state. As there can be major long-term implications, it’s prudent to fully understand the options before making any decisions.