Joe called me because he had just taken over Dad’s finances and the management of care from his brother, Jim. That’s when he made a discovery that troubled him and caused him to reach out to us.
Dad was still living at home alone but his health was declining. Joe began looking at assisted living facilities. At a cost of approximately $4000 per month, Joe was concerned about whether Dad could afford it. So I started to ask him about Dad’s assets and income.
Joe told me Dad has about $300,000 in assets but he then went on to explain that Jim had transferred almost $500,000 out of Dad’s name. He explained that Jim bought and sold investments in Dad’s account so the income was being taxed at Dad’s income level, which was lower than Jim’s. “Is that a problem”, he asked.
“It could be”, I told him. If Dad runs out of money and needs to apply for Medicaid, he’ll have to produce 5 years of records and that’s where the problem lies. They’ll see the money going back to Jim. As I always explain, Medicaid works differently than the criminal system. In the criminal system you are innocent until proven guilty, but the Medicaid system works the other way around.
I told Joe that he will have the burden of proving that the money was Jim’s and not Dad’s. As long as Jim is able to show a paper trail of assets he deposited into Dad’s account that matches the money going back to Jim then no Medicaid penalty will be assessed for a “transfer for less than fair value”.
“But I’m not sure Jim will cooperate. If he admits that the assets are his, could he or Dad run into problems with the IRS or New Jersey Division of Taxation”, Joe asked.
I have to admit that if Jim is in a higher tax bracket, that would mean a higher tax bill. And if Jim transferred assets to Dad for the purpose of avoiding income tax, he and Dad could be accused of committing tax fraud. I told Joe he’d need to consult with a tax attorney.
My focus, however, was on the Medicaid issue. I had some thoughts on how to avoid a Medicaid penalty. Next week I’ll share them with you.