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Elderly parents may give their adult children money, especially when they are just about to go into a nursing home. However, it is not always clear how much money they can give them without incurring tax issues or financial problems.
An elderly parent can give a child up to $16,000 tax-free. If there are two parents, they can give a total of $32,000 to one child. If the parents give beyond this amount, they must file a gift tax and use a part of their yearly tax exemption, which stands at $12.06 currently.
Read on to learn how much an elderly parent can legally give their child. You will also learn other details, such as how to finance nursing home costs after giving money to children and different ways to give children money without paying taxes.
How Much Money Can Seniors Gift Children Without Tax Penalties?
According to the IRS, the annual gift exemption for 2022 stands at $16,000. That means parents can give each of their children $16,000 without paying extra taxes. If a parent gifts more than that in a year, they must file a gift tax return.
The person who receives the money doesn’t have to pay any taxes. Couples can combine their yearly exclusion and give each of their children $32,000 per year, tax-free.
Gifting Money Versus Giving an Inheritance
An elderly parent may choose to give money to their children in place of inheritance. Let’s examine the options an elderly parent may take regarding this matter.
When To Give Money
Giving children money or leaving an inheritance is mostly a personal decision. However, many prefer giving money to their adult children while they are still alive instead of leaving an inheritance.
A study by Merill shows that 65% of Americans aged 55 and older prefer giving money to kids and families while they are still alive.
Here are some of the most common reasons why they may do so:
Offer Them Help
Giving money to an adult child to help them sort out some issues, such as starting a business or paying for their first home, is a good idea. Instead of just watching the children struggle so you can leave them with an inheritance, giving money now is better, as it will help them navigate life more easily.
Reduce the Estate Tax Burden
Giving money or assets reduces the size of an estate and the amount children will pay as inheritance tax. Thus, if you give your children smaller annual sums of money while you are still alive, both you and the children can avoid paying extra taxes on it, allowing you to keep more of it.
So, giving away some of your money now can benefit you and your adult child.
When To Leave an Inheritance
There are circumstances when leaving an inheritance is better than giving money now. These include:
When You Want To Avoid Drama
Sometimes, issues may occur when parents give money to their children.
For example, let’s say a parent wants to give equal amounts to all their children. Since people always have different needs, children who are not financially stable can feel that their financially-stable siblings don’t need the money or could have received a lesser amount.
Drama can ensue, causing divisions in a family. Parents may want to avoid such happenings by choosing to leave an inheritance.
When Parents Don’t Want To Outlive Their Expectations
Older people giving money should carefully evaluate how much they need to give their children and how much to keep. Doing so helps prevent a scenario where a parent gives out all their money or leaves very little to themselves, then, later on, starts to depend on their children.
Can a Parent Give All Their Money to Their Adult Children?
Parents can give all their money to their children. However, they will pay tax if the amount exceeds the annual exemption.
In cases where the child will be a caretaker or finance their parents’ medical care or living costs, putting them in charge of their parent’s assets makes sense. However, the parent will have to pay extra taxes to grant the child all the money.
Still, other options, like setting up joint accounts, can help make this transition cheaper and more manageable.
Financing Nursing Home Costs After Gifting Children
If a parent decides to give their adult children money, they should consider how they will pay for their nursing home care. Here are some options.
Retirement Funds
You can pay for your retirement home accommodations using retirement funds. However, if the person stays in a home for a long time, the funds might get exhausted while they are still there. Hence, it’s crucial to always have a backup plan in case of emergencies.
Long-Term Care Insurance
Seniors can also use long-term care insurance to pay for at-home care, assisted living care, adult day care centers, and nursing home care. However, they can only benefit from the insurance if they take it early enough.
A person may not be eligible for the coverage if their health is poor or they currently live in an assisted living facility or nursing home.
Other Ways To Pass Money From Parent To Children
There are several options on how parents can transfer money to their children, other than giving cash. These options especially come in handy if they don’t want to pay extra taxes.
Paying Directly to an Education or Health Institution
A parent doesn’t have to give you money in cash. Instead, they can pay their children’s tuition and medical or dental expenses. However, they must make payments directly to the institutions to avoid excess tax fees.
Creating a Trust Fund
A parent can also create a trust fund to transfer money to their child. According to US Bank, a trust fund refers to a legal entity that holds assets or property on behalf of another person or organization.
Creating a trust fund helps eliminate the hassles of passing large amounts of money in cash and inheritance taxes.
I’ve written a comprehensive guide about creating a trust fund for the elderly. Read it for a step-by-step guide. How to Set Up a Trust Fund for Your Elderly Parents
Does Gifting Money Affect Medicaid Eligibility?
Giving money to children can affect Medicaid eligibility. If an older person applies for Medicaid, they must provide detailed financial information for the past five years. If a person has given money during that period, they may incur a penalty, which makes them ineligible for Medicaid for some time.
To get Medicaid, you can’t have too many assets. In hopes of getting Medicaid coverage, some people try to give their children their money, allowing them to hold it while the parent applies for Medicaid.
However, the government sees all, and they know this trick. They will trace your financial history to ensure you do not give away money to your children to qualify.
Therefore, making significant money transfers five years before applying for Medicaid is risky, especially if a senior doesn’t have long-term care insurance.
Conclusion
A parent can give money to their child tax-free as long as it does not exceed $16,000 in a year. However, this amount does not remain constant. It is subject to change upon review by the IRS.
When a parent gives a higher amount in a year, they are supposed to pay taxes. Luckily, they can use other methods of passing wealth without paying taxes, such as creating a trust fund and transferring money directly to education or health institutions.
How To Set Up a Trust Fund for Your Elderly Parents
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