The 4 Questions to Answer Before Making Gifts [Part 2 of 4]

In our estate planning and elder law practice, we talk with many clients who are interested in making significant gifts of assets during their lifetimes to their children. Anytime we meet to discuss lifetime gifting, we inevitably discuss 4 topics of consideration:

1. Will the gift create federal gift tax problems? 2. Will the gift create Medicaid eligibility problems? 3. Will the gift create income tax basis problems for the next generation? 4. Will the gift create state property law problems?

The discussion regarding the first question is answered here: Part 1 of 4.  Now, on to the next one:

Will the gift create Medicaid eligibility problems?

The answer necessarily involves some understanding of the Medicaid program. Medicaid is the governmental program that pays nursing home expenses for individuals who are in need of those services. The spousal rules are a little more complicated, but for the sake of a simple explanation, a person doesn’t qualify for Medicaid unless that person’s total countable resources are less than $1,500.00. In other words, in general, Medicaid isn’t going to step in and pay unless you have no other assets to use to pay your own way.

I’m sure you’ve already thought of a solution. Just give away all your assets to your children and then qualify for Medicaid when you need nursing home services. That would work if it weren’t for two concepts built into the Medicaid eligibility rules: “improper transfers” and “penalty periods.”

An improper transfer is a transfer of assets to another person for less than fair market value (i.e., a gift) anytime during the 5 year period before a person is otherwise eligible for Medicaid benefits. The penalty period is the period during which the Medicaid program refuses to provide payment for services as a result of an improper transfer. The penalty period is calculated based upon a formula. A simple example might help:

Suppose a widow makes a gift of $60,000.00 to her son in year 1 and becomes otherwise eligible for Medicaid benefits 3 years later. At that time, she has no resources and has health issues which require long-term skilled nursing care, i.e., she needs Medicaid to pay. However, Medicaid will “look back” and find the $60,000.00 gift from 3 years ago. When Medicaid finds the gift, they’ll divide the amount of that gift by something called the Average Private Pay Rate (approximately $6,000.00). The result of that division (60/6) is the number 10. 10 is the number of months that the Medicaid applicant will be penalized for making the gift.

In other words, the widow needs nursing home care, has no money, but won’t receive Medicaid benefits due to the gift until another 10 months have elapsed.

Depending upon the circumstances, there may be ways to fix the problem, but, absent some other planning opportunities, what’s likely to happen is that the gift is going to have to be returned for purposes of paying nursing home expenses (of course, that’s assuming the child still has the money).

This isn’t to suggest that there are never any planning opportunities in a Medicaid eligibility setting, but I am suggesting that gifting assets without an understanding of the impact of that gift on Medicaid eligibility could have disastrous consequences.

Mark Coriell

Read Part 3

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