People are often confused between the rules for estate taxes, gift taxes, capital gains taxes and Medicaid. Here is a brief summary of some of the rules.
Estate Tax and Gift Tax. If you are a member of the middle class, you are not subject to gift taxes during your lifetime and estate taxes upon your passing. In 2020, you will not have to pay gift or estate taxes to the federal government unless your estate exceeds $11,700,000 (or $23,400,000 for a couple*) This is the basic exclusion amount. The estate tax and gift tax are unified. That is, one can use her basic exclusion amount during her lifetime and then she can use whatever is left over upon her death. For example, if John uses $9,000,000 of his basic exclusion amount during his lifetime, he will have $2,700,000 left to use upon his passing. If he has more than $2,700,000 in countable assets at the time of his death, his estate will have to pay an estate tax.
Please note that under current law, as of January 1, 2026, the basic federal exclusion amount will be reduced to $5,490,000. Of course, the law can change multiple times before that date.
You will not have to pay estate tax to New York State unless your taxable estate exceeds $5,850,000 ($11,700,000 for a couple*).
New York does not have a gift tax. However, there are certain gifts that may be taxed to your estate if you pass away within three years of making the gift.
It is true that you do not have to pay a gift tax if you only gift $15,000 per person in a year or if you are married and only gift $30,000 per person in a year. (There is no limit to the number of people to whom you may make a gift.) This is called the annual exclusion amount, which is to be distinguished from the basic exclusion amount mentioned above. As we said above, the gift tax and estate tax are unified and as you make gifts, your basic exclusion amount is reduced. However, if you only gift the annual exclusion amount, it does not reduce your basic exclusion amount. For example, if you have $1 million of your basic exclusion amount left and you only gift $15,000 to each of your three children, you will not reduce your exclusion amount: it will still be $1 million.
Please note that if you gift more than the annual exclusion amount of $15,000, you should file a gift tax return. If you have not used up your basic exclusion amount, you will not owe a gift tax, but you still need to file a gift tax return.
Capital Gains Tax: Capital gains taxes on appreciated assets should also be considered. If John buys a share of stock for $100 and then sells it for $500, he will have to pay a capital gains tax on the appreciated amount, that is, the difference between the amount he paid for it and the amount he received for the sale of it; in this case, $400. If John gives the stock to Suzy and she sells it for $500, she will also have to pay capital gains tax on the $400 profit. However, if John gives the stock to Suzy upon his passing, the capital gains taxes are erased up to John’s date of death. Thus, if Suzy sells the stock before it appreciates after John’s death, she will not pay any capital gains tax on the sale.
Medicaid: I have had countless people come into my office thinking that they can transfer $15,000 (the annual exclusion amount) without incurring a penalty for Medicaid. That is not true. The annual exclusion amount only applies to gift taxes. Medicaid will impose a penalty for such a transfer. A discussion of proper Medicaid planning is beyond the scope of this article, but it will suffice here to say that there is planning that can be done even if one is on the eve of needing Medicaid. However, transferring $15,000 to various people is not part of proper Medicaid planning.
Conclusion: I hope this helps you to understand estate, gift and capital gains taxes, and Medicaid somewhat better. If you know someone who you think will enjoy this email newsletter, please pass it along to them. If they email me, I will be glad to put them on my list of recipients.
*If the couple does the appropriate estate planning.
