Step-Up in basis vs. Gifting (Medicaid Planning)

Gifting

Gifting of one's estate is a common estate planning tool which has several benefits.  For estates which are over the estate tax exemption, gifting is a way to transfer the estate in today's dollars (sometimes even with a discount) as well as today's estate tax exemption amount. 

However, even for clients who's estate is not over the exemption amount, gifting can still be beneficial, particularly if the client is preparing to access Medicaid, such as nursing home support.

The basic rule is that when you gift a property or an asset, then you also gift the basis in the property.  For example if your grandfather has a house he paid $500,000 for in 1990, which is worth $2,000,000 today, when he gifts it to you, you will inherit the $500,000 basis in the property. If you then sell it, you would pay tax on the gain which would be the sales price ($2,000,000) minus the basis ($500,000).

Step-up in Basis

Step-up in basis is a different concept and applies only when an asset is receive through in inheritance as  a result of a death.  The concept here is that the same property above, if received by the grandson as a result of grandpa's death would get a step-up in the basis from $500,000 to the FMV today of $2,000,000. In this case when grandson sells the property for $2,000,000 there will be no tax on any gain, because the basis has been stepped up also to $2,000,000.

When to use which?

All other things being equal, the step-up in basis is very attractive and if possible should be prioritized.  However, if the estate is very large and gifting is needed to reduce the eventual estate tax, then the estate tax saving could outweigh the step-up benefit.

Also, if it is very likely that grandpa is going to need nursing home care and the family is desirous of preserving the assets vs. using them to care for grandpa, then forgoing the step-up by gifting would at least preserve the asset vs. spending (or losing) it altogether in nursing home costs.

Is it possible to have both?

While you cannot both completely give the asset away and remove it from your estate and get the step up in basis, there is a case where it may be possible to at least access Medicaid and still get the Step-Up in basis. There are planners who specifically focus on Medicaid planning who have developed trusts in which the assets are still includable in the estate, which allows the assets to continue to get the Step-Up in basis. However, since the trust is in place, the assets in the trust will not count toward the Medicaid calculation and thus not be required to be used prior to accessing Medicaid.  Of course, there are still look back issues which must be considered as well as state specific Medicaid issues. 

For each of these considerations you should consult a qualified estate tax CPA or attorney  and if Medicaid is part of the equation, then a specific Medicaid planning attorney who can help you determine what is best for your particular situation.