I am thinking about gifting like $70k to a disabled friend who has MS so she can purchase a small condo. She can't work right now and is collecting disability checks from the government. It is only like 1k a month which would be enough to live on if she didn't have a mortgage or rent.
My question is, would she have to pay taxes on this if I do go through with the gift? If she does then that won't be enough to purchase the small 1 level place I had in mind. But I can't afford any more. So, does anyone know the answer to this or have any advice?
My understanding is that you would have to pay gift tax on any gifts over $11,000 per year. There are still a number of ways around this. One idea is for your friend to get a balloon mortage, and you pay her the $11K per year. She would accumulate the payments to pay off the balloon balance.
Another option is for you to buy the condo and simply let your friend stay there for little or no rent. If your $70K will not cover the entire price, get a mortgage, and put something like 50% down. The money you keep in savings will make the payments. If you time it well, the money may out live your friend. At that time, sell the condo to get rid of the mortgage and repay your savings.
Those are some interesting ideas, thanks. I was wishing I could just somehow give it to her so she would own something. She wants to be as independent as possible which is understandable.
It's too bad there are no exceptions for those with disabilities though. I was hoping there was but it doesn't seem like it. I should probably consult an accountant or someone about this too.
Henry
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I am not a tax advisor or attorney but my understanding is:
You do not have to "pay" gift tax on any amount over $11,000. What actually happens is that gifts over $11,000 are no longer excluded from being "subject to tax" and will have to be reported on a gift tax return. At that point the potential tax on the non-excluded amount starts to count against the $345,000 gift tax credit part of the lifetime gift and estate credit which effectively excludes a lifetime amount of $1,000,000 of gifts from tax. This is explained in IRS Publication 950. This is part of a unified credit against both gift and estate taxes. If you are concerned that you may have a taxable estate in the millions of dollars, planning against how you will avoid excessive estate and gift taxes is in order. If your estate plus gifts does not reach the thresholds explained in Publication 950 allowing for your guess as to how Congress will continue to treat this credit after 2011, then you can certainly make gifts larger than $11,000 in one year with little liklihood of actually paying any tax. If it is important to you to make this gift, as it sounds that it is, consult a tax advisor or an estate planner to understand the details of gift and estate taxes.
I see. This is good info and now I think my idea will work.
I read publication 950 online
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and it does sound like neither her nor myself would owe taxes. But I would have to report it like you said, and it would count against my 345k gift tax credit which I could never possibly come close to exceeding. I don't understand the difference between the 345k and 1M but maybe if I re-read it it will make more sense. Still, I will take your advice and consult a tax advisor. Thanks for the info.
Henry, The quick answer is no, the recipient of a gift doesn't pay tax in the situation you're describing. The fact that you gave more than $11k in a single year to one individual would require that you file a gift tax return in the year of the gift. That gift may never result in any tax paid, though - I think other posts address this.
But I don't think anyone's mentioned that it might not be a great idea to gift a condo to a disabled individual without first understanding the effect the property will have on aid she receives, both now and down the line, and the disposition of the property should she receive aid, specifically Medicaid. You might be better off making the form of your gift a reduced (or zero) rent on a property that you retain ownership of. Check in your area, there should be some social services agencies that can provide some guidance on these topics. And it would be a good idea to get the advice of a lawyer regarding the property and the arrangement with your friend.
Boy they sure do make it difficult if you come down with a disabling disease. So you have to be homeless to get coverage, geez. I guess whatever you do, don't get sick. - H
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Well it might not be quite that bad but as an example, if you have medical costs covered by Medicaid, and you own a home, the state in question may have the right to seek eventual repayment from your estate. She shouldn't be forced out of the home during her lifetime but the value of the home could end up going back to the state, if that's how much medical cost was covered through the program, and that's how your state does things.
[In a more civilized society an individual unlucky enough to draw an MS lottery ticket would not be forced to devote all of their assets towards unaffordable and absurdly priced medical services. Unfortunately that's the system we have in place, and there isn't much on the table suggesting major changes.]
The point is, these benefits programs are complicated and vary by state to a certain extent. You should be able to find free legal aid of some type to find out more about the benefits and maybe even to help plan out this setup with the condo. My hunch is that you could accomplish your purposes (low-cost or free housing) without handing over title or jeopardizing any benefits.
I just found out that she will be eligible for Medicare (as opposed to Medicaid) in a few months. Apparently it available for the elderly and some people with disabilities. From what I am reading, Medicare doesn't place any importance on what the recipient owns. So I think we are still OK.
Where the issue often comes up is with long-term care, which is only covered by Medicare in limited circumstances - so Medicaid is the program that ends up covering it. I don't know how it works when Medicare coverage comes from disability rather than age, but I believe here in CA, Medi-Cal (which is this state's Medicaid program) picks up the slack, so those issues regarding claims against the home could come up despite coverage by Medicare. This isn't my specialty and I'm not familiar with all of the rules, and as I said they're different in each state anyway.
I guess the way I'd phrase it is, "is there an advantage to putting the house in her name, rather than instead buying it and allowing her to live there rent-free?" I don't know the answer to this but it seems that there are a lot of scenarios where a creditor could get the house, and none of those scenarios would happen if it was simply your property and you allowed free rental. And either way she has a place to live.
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