Why Gifting Incorrectly Can Cost You

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The Hidden Dangers of Gifting: How Good Intentions Can Go Wrong

It is a natural and generous impulse for seniors to want to give financial gifts to their children and grandchildren. While this is a wonderful way to help loved ones, making large gifts without professional guidance can lead to unintended and severe consequences, from creating unexpected tax bills to jeopardizing eligibility for long-term care.

The Capital Gains Tax Trap

One of the most common mistakes is gifting highly appreciated property, such as stocks or a vacation home. When you give a gift during your lifetime, the recipient also inherits your original cost basis. If they later sell that property, they will have to pay capital gains tax on the entire difference between the original purchase price and the sale price.

In contrast, when property is inherited after death, it receives a “step-up” in basis to its fair market value at the time of death. This means the heir can sell the property shortly after inheriting it with little to no capital gains tax. This is a critical distinction that can save your family tens of thousands of dollars.

Jeopardizing Long-Term Care Eligibility

The rules for gifting are completely different from the rules for government assistance programs. Both Medicaid and Special Assistance have strict “look-back” periods to review any gifts or transfers made for less than fair market value.

  • Medicaid has a five-year look-back period.
  • Special Assistance has a three-year look-back period.

Any significant gifts made during these periods can trigger a penalty, making you ineligible for benefits for a certain number of months, even if you are otherwise qualified. This can be financially devastating for families facing the high cost of care. Proper planning is essential to navigate these complex rules.

The Irreversible Mistake: Loss of Control

Once you give an asset away, you lose all legal control over it. While North Carolina has a “gift-back” rule that can sometimes cure a transfer penalty, it requires the recipient to be willing and able to return the gift. You cannot force a child to return money they have already spent, and you cannot expect a grandchild to give back a tuition payment. Relying on a gift-back is a risky and unreliable strategy.

Strategic Gifting as Part of a Plan

Gifting is not always a bad idea, but it must be done strategically as part of a comprehensive estate plan. An experienced attorney can help you understand the tax and long-term care implications of any gift and structure a plan that allows you to help your loved ones without putting your own financial security at risk.

If you have questions about gifting or asset protection, our experienced attorneys can help. Call our office at (919) 256-7000 to schedule a consultation.