At Surprenant & Beneski, P.C., our estate planning attorneys have been providing excellent legal counsel and representation to clients throughout Southeastern Massachusetts for many years. Among our areas of special focus are asset protection and minimizing tax liabilities, both of which can benefit from strategic gifting. In order to use the tool of gifting most effectively, it is essential to understand the differences between gifting appreciated assets and gifting cash.
Asset Protection and Minimizing Tax Liability in Estate Planning
Asset protection is critical in estate planning. Without it, large portions of hard-earned wealth can be lost to future creditors, lawsuits, scams, divorce agreements, long-term nursing costs, or irresponsible heirs.
Our accomplished attorneys have the in-depth knowledge and skill to structure your finances in a way that maintains the integrity of your estate while ensuring that you leave your beneficiaries a maximum inheritance. By the same token, minimizing your tax liability ensures that the beneficiaries of an estate will not have their inheritance whittled away by unnecessary taxes.
Crucial to this process is understanding the distinction between gifting appreciated assets and gifting cash.
Gifting as Asset Protection
Strategic gifting can play a vital role in asset protection, especially when considering the implications for estate taxes and MassHealth (Medicaid) eligibility. By gifting within allowed limits, you can lower the overall value of your estate, potentially reducing estate tax liabilities and improving eligibility for Medicaid by decreasing your countable assets.
It’s important to understand that gifting is regulated with annual and lifetime exclusions, and staying within these limits is essential to avoid unwanted tax consequences. For 2024, the Federal gift tax exclusion is $18,000 per recipient, and the federal lifetime gifting limit is $13.61 million, allowing substantial assets to be gradually moved out of your estate without taxation. However, that $13.61 million limit won’t last forever. The federal estate exemption amount is set to drop back down to $5 million (adjusted for inflation) in 2026. However, most tax-free gifts made before the lifetime gift and estate tax exemption drops won’t trigger higher tax bills in 2026 and beyond. This creates a unique opportunity for larger estates to take advantage of the higher exemption amount to reduce the taxable estate before 2026.
In the context of MassHealth, strategic gifting can be part of a well-structured plan to protect assets from being consumed by the high costs of long-term medical care. Nonetheless, it’s essential to take such steps with the guidance of a savvy estate planning attorney since not meeting the requisites of the 5-year look-back period for government benefits can result in costly penalties.
Comparing Gifting Appreciated Assets to Gifting Cash
When choosing between gifting appreciated assets, such as stocks or real estate, and gifting cash, there are several tax implications to consider. Gifting appreciated assets at death can be particularly advantageous from a tax perspective. When a recipient inherits an asset at your death, its value is typically “stepped-up” to its current market value, which can significantly reduce capital gains tax should the recipient decide to sell.
For example, if your beneficiary receives appreciated stock as part of their inheritance that has grown in value, the recipient inherits your cost basis but receives a step-up in basis upon your death. This means that if they sell the stock, they will be liable for capital gains tax only on the growth of the asset since the time of inheritance, not from the time you originally acquired it.
Gifting cash, on the other hand, is straightforward but does not offer the same tax advantages. The recipient receives the cash with no associated tax implications until it is invested. However, it lacks the potential for a stepped-up basis, and therefore, does not provide the same level of tax efficiency as gifting appreciated assets. Gifting cash has the benefit, however, of reducing your taxable estate if gifted during your lifetime, without the recipient incurring capital gains tax implications.
Contact Our Experienced Asset Protection Attorneys Today
While both gifting strategies have their place in estate planning, the choice between gifting appreciated assets versus cash must be considered in light of your individual circumstances and personal goals. Contact Surprenant & Beneski now for the insight and advice of a seasoned professional so you make the best decision for you and your loved ones.