The "Gift" of Health Insurance

I frequently come across clients who want to help their children financially, but they do not want to give them money directly. There are numerous ways to do this, including:
1) gifting an interest in a limited liability entity (such as an LLC, an S-Corp or a limited partnership);
2) making gifts to a child via a trust;
3) paying for a child's or grandchild's tuition; and
4) paying for a child or grandchild's medical expenses.

In the first two categories, there is a limit to the amount that can be given tax free. This amount is known as the 2503(b) exemption amount, and it currently stands at $13,000. However, for the third and fourth categories, a parent can pay educational and medical expenses for a child, regardless of amount, and not have to worry about paying a gift tax at all.

When many people consider making a gift for medical purposes, they think that they have to pay the doctor directly on behalf of the child. There is something else that can be done though - they can also pay their child's health insurance premiums. According to Treasury Regulation 25.2503-6(3), "the unlimited exclusion from gift tax includes amounts paid for medical insurance..."

Since insurance premiums have been increasing by double digit percentages almost every year, wealthy parents should take advantage of this option to help out their children and provide piece of mind to themselves. This is particularly true if their child has been laid off in this down economy.

By directly paying the insurance company for their child's health insurance bills, parents can also make an additional $13,000 gift (either in cash or indirectly), to help out their child or minimize their estate for estate tax purposes.