Gifting in NC and “Back Door” Taxes
The Hidden Tax of Giving: How Gifting Can Backfire for Seniors
Gifting to children and grandchildren is one of the great joys for many seniors. However, this act of generosity can create unexpected and costly problems if not done with careful consideration of the tax and long-term care consequences. What seems like a simple gift can result in a “back-door” tax bill for your loved ones and jeopardize your own future care.
The “Back-Door Tax”: A Costly Capital Gains Surprise
Most people know about the annual federal gift tax exclusion ($18,000 per person for 2025). What they don’t realize is that gifting highly appreciated property—like a home, farm, or stocks—can trigger a significant capital gains tax for the recipient.
Here’s why: When you gift an asset, the recipient also inherits your original tax basis (what you paid for it). If they later sell that asset, they will owe capital gains tax on the difference between the sale price and your original purchase price. In contrast, if they inherit that same asset after you pass away, they receive a “step-up” in basis to the property’s fair market value at the time of your death. This often eliminates the capital gains tax entirely.
Example: You gift your child a home you bought for $50,000 that is now worth $450,000. If your child sells it, they could face a capital gains tax on a $400,000 gain. If they inherited it instead, they could sell it for $450,000 and likely pay no capital gains tax.
The Long-Term Care Penalty: The Look-Back Period
The rules for government benefits are completely separate from tax laws. Programs like Medicaid for nursing home care and Special Assistance for assisted living have strict “look-back” periods. Any gifts made within these periods (five years for Medicaid, three for Special Assistance) can result in a penalty, making you ineligible for care when you need it most. The annual gift tax exclusion does not protect you from this penalty.
The Solution: Strategic Planning
This doesn’t mean you can never make gifts. It means that any significant gift should be made as part of a strategic conversation with an experienced elder law attorney. There may be ways to achieve your goals—such as using specialized trusts—without creating these unintended consequences.
This is a critical part of a comprehensive approach to your estate plan that considers all the variables. Call our office at (919) 256-7000 to schedule a consultation.