25 Mar For Medicaid, should parents put kids on joint account?

Q. My mom and dad are thinking of withdrawing $200,000 from their savings to a joint account with just me and my sister in order to qualify for Medicaid in the future, if needed. Will my parents have to pay taxes on the $200,000?
— Daughter

A. This isn’t as simple as you may think.

In order to determine if any taxes would be owed, we would need a little more information, but before we go there, let’s talk about the idea of this account.

The transfer of the $200,000 would be considered a “gift” of assets, said Joe Sarnecki, a certified financial planner with U.S. Financial Services in Fairfield.

He said each year, you are allowed to gift $15,000 to any individual without the need to report the gift.

This is known as the annual exclusion amount.

“In this instance, both Mom and Dad can gift you and your sister $15,000 each, totaling a gift of $60,000,” Sarnecki said. “For the remaining $140,000, it would be considered a taxable gift, and you would need to file a gift-tax return.”

He said although it is considered a taxable gift, taxes are not necessarily owed as the IRS provides what’s known as a lifetime exemption from gift taxes. This allows a married couple to gift away up to $11.58 million — each.

“Keep in mind, the gift tax and estate tax share this amount, so a person can give away this amount while alive or upon death without incurring any taxes,” he said.

You said the objective of the gift is to help qualify for Medicaid in the future.

Medicaid has a five-year look-back period, where any assets gifted away during that time would be subject to a Medicaid penalty period, Sarnecki said. During the penalty period, Medicaid will not pay for the long-term care.

Your parents should really meet with an elder care attorney to make sure they’re planning properly for Medicaid.

Now to your question about taxes.

This will depend on how the money is currently being held.

If the money is coming from a cash account such as checking, savings or a money market, there would be no taxes owed, he said.

If the $200,000 is in an investment account and they liquidate the holdings, they could be subject to capital gains if they have earnings, he said.

“For any holding held less than one year, it would be a short-term capital gain, and subject to their income tax rate,” Sarnecki said. “If the asset was held longer than a year, it would be subject to long-term capital gains, which can either be 0%, 15% or 20% based on their income.”

If they do not liquidate and instead transfer the assets directly to you and your sister, you would inherit their cost basis — what they paid for the investment — and you and your sister could be subject to taxes when you ultimately liquidate, he said.

For example, Sarnecki said, if they invested $100,000 — their cost basis — and it grew to $200,000, they would have a $100,000 capital gain. If they gifted you the actual investments, you would keep the $100,000 cost basis and pay capital gains taxes on any earnings above that $100,000.

One other item to consider is the titling of the new account.

“Transferring the assets into a joint account in you and your sister’s name leaves them subject to creditors, divorce,” Sarnecki said. “One thought may be to create a trust, which would further help protect the assets, which is one of the strategies an elder care attorney could assist with, if appropriate.”

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This story was originally published on March 25, 2020.

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