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Refundable Gift

2010-01-20 by Eva Rosenberg

Today TaxMama hears from Karen in Arizona with this sad question. “A parent distributes an annual gift of $13,000 to a child for 4 years depleting all assets. If the parent requires full time nursing care before the end of the 5th year and has only Social Security income available, is the child required to return the gift funds and all interest earned?”

Dear Karen,

In a word?

NO.

A gift, according to the Merriam-Webster dictionary, is something voluntarily transferred by one person to another without compensation.

According to IRS – Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return.

For tax purposes, when there is consideration, an obligation to return the money, it’s not a gift. It’s a loan and requires interest to be paid by the recipient, and reported as income by the giver.

In the real world, once you give a gift, you have given up all rights to it. The recipient gets to do whatever s/he wants to with the money. If your child chooses to help you, that’s probably a good and kind thing to do. However, if the child is a selfish beast, or has spent the money – those are the breaks!

It’s never wise to totally deplete your savings simply to avoid taxes. Folks make those maximum gift transfers each year because their asset values are so high, they want to avoid estate or gift tax. This practice is foolish for folks of minimal means. Unless, of course, you’re trying to deplete your assets so you can receive MediCal or other low-income services.

Wish I had better news for you. But you cannot compel your child to return any of the money – much less interest in it! Now, it’s all up to how you raised him – or her.

And remember, you can find answers to all kinds of questions about gifts and other tax issues, free. Where? Where else? At TaxMama.com.

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# | Posted in Tax Quips | Comments » (9)

All Comments

Mort Kafrissen Says:
January 20th, 2010 at 07:01 am

I disagree in part with the answer on the gift. In PA and
most states you may not
give away your assets when you expect to go to a nursing home. Thus you may be required to either return the
gift or the government may count those gifts as an asset of the donor.Any "gift" within
3 years of going into a nursing home is usually counted as owned by that donor.See if any other responders had this comment.

Bill Geyer Says:
January 20th, 2010 at 07:05 am

You are not exactly correct on this one Eva. in many states, there is a little used law (but growing in popularity) that may require a "wealthy" child to fund his indegent parents nursing home care and/or reimburse the care facility and Medicaid as well. Even if the child became wealthy on his/her own merits. It is called filial responsibility law and is designed to prevent medicaid from being used as an inheritance/gift protection plan.

Mary Dahlberg, EA Says:
January 20th, 2010 at 08:33 am

Actually it is a federal law as well. Plan Your Estate, by Attorney Denis Clifford, page 432 states: Federal law prohibits transferring assets within three years of applying for Medicare, so an expert attorney is a must.

Laura Holt Says:
January 20th, 2010 at 08:33 am

I agree with Mort. I worked in a firm in Washington state that did alot of guardianships. When money was transferred from the parent to the child within 3 years of having to go into a nursing home it was considered to be in avoidance of having to pay for the parents care. Medicaid would go after the child for the amount that was 'gifted' by the parent to the child during those 3 years.

Carol Lawlor CPA Says:
January 20th, 2010 at 08:50 am

I agree with the discussion re: the lookback period and Medicaid. HOWEVER, the lookback period was extended to 5 years by the Deficit Reduction Act which took effect 2/8/06.

Glenda Whitson EA Says:
January 20th, 2010 at 04:04 pm

In all fairness to Taxmama she is looking at the situation from a tax standpoint. IRS rules and state Medicaid, Medi-Cal have their own set of rules and lookback periods.

The state requires a lookback period if you are seeking state aid to pay for your nursing home care. Can you blame them? The IRS doesn't give a hoot.

I was surprised about requiring children that are wealthy to pay for parents nursing home care. Here in Missouri I've never heard of that.

Gregory Noe Says:
January 21st, 2010 at 06:27 am

It seems were collectively all over the board on this one because MY understanding, in Ohio at least, is that, transfering assets within the 5 year look back period doesn't do anything other than extend the period UNTIL the individual would qualify for Medicaid. That is, in this case, Medicaid would not pick up the tab UNTIL it had been 5 years from the date assets over $1500 had been transferred and even then there might be some proration and/or extenuating circumstances (exceptions).

By the way this general approach is quite popular in some circles. I call it the "Paupers Estate Plan" which basically is to divest elder family members of all their wealth 5 years before they MIGHT need to qualify for Medicaid.

I would really like to see the chapter and verse outling the rule(s) saying a child must return funds or pay for a parent. I just cannot believe this CAN be true. For a practical matter, that money would most likely be gone an hour after the gift so how could the government FORCE someone to return it. Further, I cannot believe a child would ever become responsible for the debts of a parent. Help me to understand this one

Dave Andrew Says:
January 21st, 2010 at 07:07 am

Filial Responsibility laws – check out this disturbing info at: http://elder-law.lawyers.com/Filial-Responsibility-Supporting-Your-Parents.html.
The gifts in the original question were probably given so that the parent could qualify for medicaid. The state medicaid offices are the ones who enforce the 5-year medicaid lookback, so they would probably go after the funds transferred to the child. Medicaid has a formula for recovering those funds, but it's not 5 years after the last funds, it has to do with the amount of money given. Medicaid sites have the details.