For many families struggling with infertility, the financial assistance of their families can be a lifeline in the efforts to build their family. A parent, grandparent or any other person may wish to assist with these expenses, but may be concerned about the gift or estate tax consequences of such assistance. Within certain guidelines, payment of the expenses can have no gift or estate tax consequences.
Under Section 2503(e) of the Internal Revenue Code, people may pay for certain educational and medical expenses of others without incurring any gift tax or using any of the $13,000 annual exclusion. This exception to the gift tax is frequently referred to as the “ed/med” exclusion. Parents who are concerned about estate and gift taxation may use this exclusion to transfer value to their children above and beyond their annual exclusion gifts so long as certain rules are followed.
First, the expenses must qualify as expenses for “medical care” as defined in I.R.C. Sec. 213(d). This is defined as care “for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” It has been long settled that procedures to facilitate or prevent pregnancy qualify as medical care, so basic infertility treatments will qualify as medical care.
In a private letter ruling issued in 2003, the I.R.S. determined that expenses preparatory to performance of a procedure that is medical care will themselves also be considered expenses for medical care. This ruling provided that expenses associated with using donor eggs – the donor fee, agency fee, the donor’s medical expenses and insurance for post-procedure medical expenses and legal fees for the donor contract – would all be considered expenses for medical care.
The law is not settled on whether the costs associated with surrogacy would be considered expenses for medical care, but the determination is likely to focus upon whether there is a mental or physical defect or illness that prevents the person from procreating. So, for a couple where the woman is unable to conceive and carry a child to term, the I.R.S. would likely consider surrogacy expenses to be for medical care. However, they have determined that surrogacy expenses were not medical care when utilized by a man who had no fertility issues.
Second, expenses must be paid directly to the service provider. The person making the gift under the exclusion should ask for the bills or statements, and make the payments directly to the providers. This allows that donor to confirm that the expenses qualify as medical care and to pay the provider directly.