Which of the following is better for your client? Option 1 calls for saving $150,000 in estate taxes today by giving $340,000 to the client’s 2 grown children, yielding approximately $7.1 million to the children in 45 years (at a growth rate of 7%). Under option 2, the client creates a tax-free benefit pool worth $19 million in 45 years. How about getting both the tax savings of $150,000 and the $19 million benefit within the same vehicle! (This assumes an estate tax rate of 45%.)
A parent or any person can gift up to $12,000 per year to each donee. Gift-splitting with a spouse can double that to $24,000 per year per child. Many financial advisors and their estate planners use the gift tax exclusion as a normal technique in estate planning. What is less well known-but accepted as settled law–is that gifts made directly to an educational facility or for medical expenses can be made on behalf of the same child above that $12,000/$24,000 level.
A “qualified transfer” is not considered a gift for gift tax purposes, which means that payments to any person or corporation that provides medical care as defined in IRC~213(e) becomes the exception to the gift tax exclusion limit. Gifts made directly to a medical plan or medical practitioners are in addition to the standard $12,000/$24,000 gift limits.
Therefore, individuals who are already maxing out gift potential may still purchase long term care insurance for their child or grandchild and remove a substantial amount of assets from an estate. In a recent case, the numbers worked like this:
To give the same potential benefit to the client’s children, the client would have needed a conservative investment, which would have paid a consistent 9.4% after tax return for 45 years!
The key is that payments must be made directly to the medical practitioner or directly to the insurance company that sponsors the medical plan (IRC ~ 2503(e)). According to IRC~7702B, long-term care insurance qualifies as a medical plan and the benefits are received tax-free (IRC~105 (b)).