Long Term Care and Gifts

Should the individual enter a long-term care facility and need to qualify for Medicaid benefits, gifting assets, in any amount, will create an eligibility problem. Pursuant to the Deficit Reduction Act of 2005 (“DRA”), any individual applying for Medicaid becomes subject to a 60-month lookback period in which any gifted or transferred assets cause a penalty period of ineligibility for the applicant. If a senior client needs Medicaid benefits, and he or she has gifted assets within the past 60 months, that client is ineligible for a specified period of time that is determined by the total gifted amount.

The annual tax-free gift exclusion is often confused with an exempt transaction for Medicaid purposes. Per giftee, the current limit for tax-free gifts is $14,000.00. This means an individual may make gifts in the amount of $14,000.00 to various individuals and not have to file a federal gift tax form.  At the same time, every gift made by this individual becomes part of the 60-month lookback period for Medicaid purposes.  Be sure to speak with your senior clients if they are making annual tax-free gifts. They should be aware of the consequences these transfers could have should long-term care become necessary in the future.

Using Gifts to Spend-Down

It may be a good plan for an individual to intentionally transfer assets for less than fair market value as part of their spend-down strategy for Medicaid eligibility.  Many clients will have concerns about making gifts that exceed $14,000.00 to each giftee.  The individual does not want to be taxed on the gifts made – after all, the purpose of crisis Medicaid planning is to preserve as much wealth as possible.

An individual may have to pay taxes on gifts made in excess of the annual exclusion, however, there is a stipulation. The individual will have to pay only if their total gifts are over $5.45 million (currently) throughout their lifetime. This is also the current estate tax limit.

This regulation was put in place to guarantee those with large estates don’t escape after-death estate tax consequences by gifting their wealth away while still alive.  The odds are likely this lifetime threshold doesn’t apply to the majority of clients seeking Medicaid benefits by utilizing the gifting/annuity strategy.  While the client will still need to file a gift tax form if the gift or gifts made exceed the annual limit, he or she generally won’t be taxed on the funds unless the lifetime gifts exceed $5.45 million.

Implications For Your Senior Clients

Medicaid regulations are complex and difficult for many seniors to understand.  Once tax questions appear, most seniors will be unable to navigate any of these issues alone.  It is vital your clients understand the effect gifting has on future Medicaid eligibility. It is also important for individuals to understand gifts in excess of $14,000.00 per person will not automatically result in taxation.

For any questions regarding how gifting affects your clients, contact our office or email us at [email protected].