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Gifting & Gift Taxes Explained
Jan L. Warner & Jan Collins

Question: My mother, an 83-year old widow, is mentally alert most of the time, but is failing physically. Because she didnít want to live with my wife and me, I hired a service to look in on her several times each week. But, sensing something was wrong, I found that her caregivers had forced her to write more than $5,000 in checks to them and threatened to hurt her if she told me. Finding no other alternative, I have been traveling to be with her each weekend.

We finally agreed that she should enter an assisted-living home. She receives Social Security and my fatherís pension of almost $1,600 monthly, has a home worth $225,000, $65,000 left in her stock portfolio, and $45,000 in checking and savings. She says that she wants to turn everything over to me now, and she wants me to take care of her expenses. If she does this, will there be gift taxes due?

Answer: Although you only ask one question, there are many issues that will be affected by what you and your mother ultimately decide to do. It is important to understand that gifts are treated differently by the taxing and Medicaid authorities.

First, for tax purposes, so long as your motherís total assets do not exceed $1 million in 2002, there should be no gift taxes paid as a result of the transfer of all her assets to you, but gift tax returns will be required for all gifts to any person that exceed $11,000 in 2002.

Second, if your mother transfers her stock to you and you later sell it, you will be taxed on the difference between your motherís ďcost basisĒ and the price you may later receive Ė assuming there is an increase in this market. This difference is called the capital gain which is subject to tax. But if your mother can qualify as being ďchronically illĒ, she can sell her stock, and if there is a capital gain, her taxes may be offset by all or a part of the cost of her care. Then she can give you the cash from the sale without tax consequence to you or her.

Third, your motherís home is quite another story. Since she is entitled sell her home and take a one-time exclusion from capital gains taxes of up to $250,000, you may want to consider having your mother sell the home and turn the money over to you for a tax- neutral transaction.

Fourth, should your motherís health worsen to the point that she needs nursing home care, her gifts to you would make her ineligible for Medicaid benefits for up to 36 months. This means that you would be required to pay for her care during the penalty period. And should you predecease your mother and your assets be distributed, who would be there to take care of her?

Generally, we do not believe it is a good idea for any senior to become impoverished and lose control of assets unless and until it is absolutely necessary. For this reason, we donít think the plan you and your mother are discussing should be implemented unless and until it has been blessed by an experienced elder law attorney. Your mother should first understand the potential downside of these transfers, including the fact that once accomplished, she cannot get her money back unless you give it back to her.

Above all else, while your mother has the capacity to do so, she should sign a durable power of attorney with appropriate gifting provisions and a health care power of attorney, the two most important documents for the living. These documents should be your number one priority and should be prepared by an attorney experienced in the elder law area.

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