Letter To The Editor:
More On The LTC Gift Tax Exclusion

Bill Comfort writes: The April 2007 LTC e-Wire letter to the editor, Leveraging the estate plan with long term care insurance  by Roy C. Goldberg, overstates the advantage of the gift tax exclusion for the payment of LTC insurance premiums.

The author writes, “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.”

The author goes on to say that LTC premiums qualify as a medical expense and can be considered a tax-free gift above the $12,000 annual gift tax exclusion limit. This is correct, but it is not an unlimited exclusion, as the author suggests.

The problem is that LTC premiums are considered a qualified medical expense only up to the age-based, “eligible” premium amount. Therefore only this age-limited amount of premium would qualify for exclusion above the standard $12,000 annual gift tax limit.

A “qualified transfer” for medical care as a gift tax exclusion is defined in the tax code Section 2503(e)(2)(B) with reference to deductible medical expenses in Section 213(d)—not in 213(e), as per the letter to the editor.

Section 213(d)(1) carries this footnote: “In the case of a qualified long term care insurance contract (as defined in section 7702B(b)), only eligible long term care premiums (as defined in paragraph (10)) shall be taken into account under subparagraph (D).” Subparagraph (D) defines medical premiums, including qualified LTC premiums, as “medical care.” Paragraph (10) is where the age-based, eligible premium table is defined. This table is indexed for inflation every year.

I can’t follow the exact details of the hypothetical policy and what the specific premiums would be, but a 65-year-old parent would have an adult child in the early-to-mid-40s when starting a plan as described in the letter to the editor. The maximum amount of premium that is excluded from gift tax above $12,000 for a 41-to-50-year-old in 2007 is $550.

If the parents are already making $12,000 cash gifts, then paying LTC premiums above this, the amount of LTC premium above $550 per year would create a taxable gift.

Bill Comfort
Comfort Assurance Group
St. Louis, Mo.
bill@comfortltc.com

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