The average age someone receives an inheritance has changed drastically in the past 30 years. According to United Income, “The average age that adults receive an inheritance has risen from 41 in 1989 to 51 in 2016. Similarly, over 25 percent of inheritances go to adults over the age of 61, indicating that inheritances may be becoming less about lifestyle enhancement and more about retirement fortification for estate recipients.”
The word “inheritance” is beginning to mean an extra cushion for retirement savings during your fifties rather than a windfall in your forties to help with children and business ventures. Because of this trend, many retirees are considering giving more assets to their children while still living.
Author of “Die with Zero” Bill Perkins shares in a blog “CEO: Why you should give money to your kids now, and not in your will” about why he believes it’s better to give to kids sooner rather than later. He shares,
“When I tell people I plan to die with zero, with no money left to give, their reaction is often, “What about the kids?” But I don’t think those two goals, of supporting my children and leaving nothing behind, are mutually exclusive. I want to give money to my children when they can best use it to plan for their futures, and while I’m still around to see them thrive.”
There are pros and cons to giving an inheritance away while you live, depending on your net worth, age, projected income, and future lifestyle. It is possible to prepare your estate to care for you through your elderly years while also maximizing your estate’s gifts to your children now and in the future.
Large Estate
If you have a large estate, one of the benefits of giving money early and often may be evading tax consequences. In North Carolina, there is no inheritance tax or estate tax, but there is still the federal estate tax.
It is likely, however, that you don’t even have to worry about the federal tax. You can give $15,000 per year per person without any gift tax at all. If you give $20,000 to one person in one year, you are still only applying $5,000 to your lifetime limit of non-taxable gifts.
If your lifetime gifts are above $15,000 per person per year AND the gross worth of your estate together are worth less than $11.58 million when you die, your estate and heirs will owe no taxes on your assets after your death.
Giving Your Home to Kids
Despite few worries about taxes in NC, there are issues to think carefully about. There are other claims that can be made on the assets of your estate if you have not planned your estate well. Planning well and planning early can make all the difference in what your children inherit from you one day.
Long Term Care Issues
There are ways of reducing your estate to qualify for Medicaid coverage for long-term care. However, in North Carolina, you can still own a home worth $585,000. So you could ostensibly qualify for Medicaid and still have a house you want to leave to your children.
If your long-term care costs are worth more than your house, Medicaid Recovery will claim the entire amount and there will be no inheritance. Federal Medicaid Recovery will ask NC to make claims against your estate to pay for the bills involved in your care and there may be nothing left for your kids once they are done with your estate.
The issue is that Medicaid has a look-back policy. You cannot give your house to anyone or place it into an irrevocable trust for the 5 year period before applying for Medicaid coverage. They will declare you ineligible for a period of time if you give assets away during the 5 year period before you apply.
Irrevocable Trust
The solution is to start your estate planning at least 5 years before you need Medicaid care. Work with your attorney to place your house into an irrevocable trust with the correct language and terms to bestow it to your heirs upon your death. This allows you to stay in your home or continue owning it even if you need long-term care and it keeps Medicaid Recovery Programs away.
You can also include in the language of irrevocable trust that you can change some of the terms of the trust or specify a person to a “power of appointment” or a “trust protector” who can change the beneficiary accordingly.
Perhaps you set up an irrevocable trust to give each of 2 children $500 per month until your death. One child withdraws their amount from the trust each month and spends a large portion of it to ensure your needs are met and take care of you. The other child may take the money and spend it on their own children. Each child is completely independently choosing how to spend the money because it is no longer your money.
However, with the right language in your trust, you may still change the terms as long as you benefit the beneficiaries. The assets you place in an irrevocable trust cannot be removed, but you can change the language of the trust with an attorney as needed.
Avoiding Capital Gains Taxes
If you want to avoid the Medicaid lookback period and just give your house to your child outright at least 5 years before needing Medicaid coverage, you may want to think again. Your child could end up paying capital gains taxes on the house because the value is not stepped up. If it was worth $200,000 in 1990 and now it is worth $400,000, your child will pay tax on a $200,000 capital gain if they choose to sell the home. If you wait to give your house at the time of your death, the value of the house is stepped up to the current market value so the child will not owe capital gains taxes if they sell.
Seek Counsel
No matter how you choose to give inheritance to your children, you can maximize your assets for your and their benefit by carefully planning your estate before making any major gifts or purchases. A knowledgeable estate planning attorney who specializes in this type of planning can walk you through what is best for your particular situation. Don’t let taxes, long-term care, Medicaid recovery, or probate take a chunk out of your estate. Get started making your plan today.