Being able to give a loved one a significant amount of money without having to pay gift tax is a major benefit offered by the federal tax code. This may seem like an ideal way to bequeath funds to loved ones without having to include the amounts in your estate plan. However, for individuals who expect to need long-term care and apply for Medicaid, this kind of gift can be problematic.
As of this writing, an individual may give up to $15,000 per year to another person without filing a gift tax return. Married couples can give a person up to $30,000 together. There is currently no limit on the number of recipients, so you under the IRS rules you can give $15,000 ($30,000 if married) to as many people as you want. While giving cash assets to loved ones is indeed permissible under the IRS rules, the timing of the gift is critical when it comes to the giver being able to qualify for nursing home Medicaid.
For many, the Medicaid program is the way in which they intend to pay for long-term care services if they require nursing home care. However, the Medicaid office can review all financial transactions for the five years before the Medicaid application was filed. This is called the “five-year-look-back period”, and includes a review of all gifts (gifts can be money or other property like cars and real estate, and would also include paying for someone’s college or other debts). Although a $15,000 gift will not be subject to gift tax or income tax, this does not protect the gift from Medicaid scrutiny. A gift within five years of applying for Medicaid will result in a penalty and a period of disqualification. That disqualification period (called a “penalty period” in the industry) is calculated by dividing the cost of the transferred funds by the average price of care (which as of this writing is $8,261 per month). For example, two $15,000 gifts could end up penalizing the gift giver approximately four months of long-term care. While this may not seem a significant amount of time, it is important to note that when an individual needs long-term care services, they often require immediate acute services.
Fortunately, while there can be issues with the gift tax and Medicaid, this does not mean all gifts are prohibited. When properly devised, assets can be transferred without endangering Medicaid eligibility or implicating taxation. Our office can help you examine your options as you prepare to qualify for Medicaid. Glenn Matecun is one of 19 Certified Elder Law Attorneys* in the entire State of Michigan and has the experience you need to plan for the future. Please contact us if we may be of assistance. https://www.michiganestateplans.com/ *Certified as an Elder Law Attorney by the National Elder Law Foundation