Tax Planning

Property Tax Planning and the Energy of Med-Ed Exclusion

Wednesday November 18, 2020

The current federal tax rate for gift and estate taxes is 40%. Once an individual avails of their lifelong tax exemption (currently $ 11.58 million and expected to halve in 2026, possibly due to election results, sooner), tax planning becomes difficult and complex. The only easy solution is to give charitable gifts and use the annual gift tax exclusion which allows one person to give gifts of $ 15,000 per year to as many people as they want, provided there are no terms with the gift connected. For people with large goods, this well-known annual exclusion is an important, albeit modest, tool for pruning their taxable goods while offering family and friends support or a small windfall.

However, there is another – often overlooked – strategy for reducing a taxable estate. Internal Revenue Code Section 2503 (e) excludes direct payment of someone else’s medical and educational expenses from federal gift tax. It is important that this direct payment is also excluded from another transfer tax, which is intended to prevent wealthy individuals from skipping generations in order to lower the estate tax, which is known as GST tax (Generation Skipping Transfer). Grandparents can therefore take advantage of the IRC 2503 (e) exclusion for the benefit of their children, grandchildren, and even great-grandchildren without incurring any estate or GST tax.

This so-called “Med-Ed Exclusion” has traditionally proven valuable to individuals who have already used the $ 15,000 annual exclusion and have used their lifetime exemptions. You can make additional tax-free gifts by paying tuition fees directly to their grandchildren’s college or private school. But what about medical care? For those with good health insurance, paying medical expenses on someone else’s behalf may not seem like a tax planning option, but the definition of medical care is extremely broad and includes amounts paid for “diagnosis, cure, mitigation”, Treatment or prevention of diseases or for the purpose of influencing a structure or function of the body. “[1] In addition, absolute exclusion from gift tax includes amounts paid for health insurance on an individual’s behalf.[2]

The definition encompasses everything from preventive medicine to inpatient services to seeing guide dogs and beyond. However, the breadth of medical exclusion can be made all the more powerful as an estate planning tool by looking at some of the innovative developments that have taken place in private medicine today.

For example, consider private medicine, which offers full, year-round full service for a fixed annual fee, such as Private Medical – a family-office-style medical practice currently operating in New York and California. Your membership in proactive, evidence-based medicine includes a personal relationship with a family doctor, a 5-person care team, state-of-the-art testing, and access to a global community of experts. A family member could make the potentially otherwise prohibitive fixed payment for their children, grandchildren, and even extended families or friends without incurring a gift or GST tax, and beneficiaries in turn would receive proactive, highly personalized medical care that is not personal is cost. Individuals can also prepay their grandchildren over 10 years or have multi-year family plans. These prepayment or multi-year payment options should also be eligible for tax exclusion. The IRS has approved the prepayment of tuition fees under the same IRC section as long as the payments have not been refunded.

For wealthy clients, estate tax planning often consists of eliminating the problem through charitable and annual bargaining gifts and complex trust structures. The Med-Ed Exclusion provides another simple and effective control solution that is enhanced by the overall health benefits.

[1] Sweetheart. Reg. ยง25.2503-6 (b) (3)

[2] The absolute exclusion from gift tax does not apply to amounts paid for medical care that are reimbursed by the recipient’s insurance company.

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