I can gift up to $14,000 per year without jeopardizing my rights to Medicaid! Right?
Perhaps the most common-and dangerous-myth of all confuses the federal gift tax with Medicaid qualification. These are two distinct sets of rules, established for entirely different purposes. In 2016, a person may gift up to $14,000 per year, per beneficiary without having to file a gift tax return or incurring any tax liability. But, Medicaid is concerned with any gifts of any amount if made within the 60 months preceding a Medicaid application. That period, often referred to as the “look-back period,” is inflexible, unless it can be proved that the gift was made exclusively for reasons other than hastening Medicaid eligibility.
Transfers of assets in exchange for something of equal value or transfers to a spouse do not affect Medicaid eligibility. Otherwise, the penalty for making gifts can be severe. The number of days that the penalty triggers may be reasonably modest (the penalty in days is calculated as the amount actually gifted divided by the average daily cost of local nursing homes). Since 2006, however, the penalty period does not begin to run until the applicant would otherwise be qualified for the program. Thus, the penalty does not begin to run at the time of the gift but much later, i.e., when the applicant has spent down all countable assets to $4,000 or less.
Applicants can remedy imprudent gifts in two ways. They can, if possible, “cure” gifts by refunding them; in that case, the returned money must be spent down before a successful application can be made. Or, they can justify such gifts if they were made, exclusively, for purposes other than accelerating rights to Medicaid.
If making gifts is important to you there are other solutions, such as transferring assets to an Irrevocable Trust and then have the trust make distributions out to the beneficiaries, however, much care should be given to the drafting of the trust and to the distributions to ensure the distributions are not deemed disqualifying. Want to discuss further? Contact our office for a free consultation.
Source: Medicaid Myths: Clients’ Misconceptions Can Be Costly, Estate Planning Journal, Oct 2015, Estate Planning Journal (WG&L)