Important To Know The Difference Between Gift Tax And Medicaid Law

Are you being told by a friend, accountant or financial planner you can give away $15,000 per year to your children and do not have to worry if you need nursing home care? Depending upon your age and health, this could be very dangerous.

Financial planning doesn't always take into consideration long-term care planning. Many people have heard of the federal Gift Tax provision that allows them to give away $15,000 per year without paying any gift taxes. What they do not know is that this refers to a Gift Tax exemption. It is not an absolute right. Having heard of the exemption they wonder, "Can't I give my assets away?" The answer is maybe, but only if it's done within the strict allowances of the law.

Even though the federal Gift Tax law allows you to give away up to $15,000 per year without incurring tax, those gifts could result in a period of Medicaid ineligibility for months, and in some cases years. Still, some parents want to make gifts to their children before their life savings is all gone.

Consider the following case study: After her 73-year-old husband, Harold, suffers a paralyzing stroke, Mildred and her daughter, Joan, need advice. Dark circles have formed under Mildred's eyes. Her hair is disheveled. Joan holds her hand.

"The doctor says Harold needs long-term care in a nursing home," Mildred says. "I have some money in savings, but not enough. I don't want to lose my house and all our hard-earned money. I don't know what to do."

Advertisement

Joan has heard about Medicaid benefits for nursing homes, but doesn't want her mother left destitute in order for Harold to qualify for them. Joan wants to ensure that her father's medical needs are met, but she also wants to preserve Mildred's assets.

"Can't Mom just give her money to me as a gift?" she asks. "Can't she give away $15,000 a year? I could keep the money for her so she doesn't lose it when Dad applies for Medicaid."

Joan has confused federal Gift Tax law with the issue of transfers and Medicaid eligibility. A "gift" to a child in this case is actually a transfer and Medicaid has very specific rules about transfers.

At the time Harold applies for Medicaid, the state will "look back" five years to see if any gifts have been made. The state won't let you just give away your money or your property to qualify for Medicaid. Any gifts or transfers for less than fair market value that are uncovered in the look-back period will cause a delay in Harold's eligibility for Medicaid.

For example, three $15,000 gifts made during the five years prior to a Medicaid application creates a significant period of ineligibility.

So what can Harold and Mildred do? They can institute a plan to save a good portion, if not all, of their estate, and still qualify for Medicaid. The plan may involve transfers of money for value received, such as a care contract. However, as we stated above, the gifts must not violate the federal law or the Medicaid rules. There are legal strategies to protection of all of the assets in the healthy spouse's name. Generally, if done properly, you can often save as much as one-half of your assets or more this way.

But remember, when it's given away, it's given away. Studies have shown "windfall" money received by gift, prize or lawsuit settlement is often gone within three years. In other words, even when the children promise money will be available when needed, their own "emergencies" may make them spend the money. You should consult a knowledgeable advisor on how to set a plan that complies with the law and achieves your goals.

Attorney Daniel O. Tully is a partner in the law firm of Kilbourne & Tully, P.C., members of the National Academy of Elder Law Attorneys Inc., with offices at 120 Laurel St., Bristol. (860) 583-1341 or ktelderlaw.com