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Can I Make Gifts this Holiday Season? (Part 2)

Last week we were talking about gift giving.  Most people assume an elderly family member can make gifts without any tax consequences as long as it doesn’t exceed $13,000 per person per year.  That’s true.  However, it may very well cause a problem if you run out of money and are expecting to then qualify for Medicaid.

 That’s because gifts are subject to Medicaid’s transfer for less than fair value penalty.  And as the rules are written, even as little as a $250 gift carries a 1 day penalty.  So does that mean you can’t make gifts?  Not necessarily.  It depends on the amount, frequency, timing, source and recipient of the gifts.  Allow  me to  explain.

 If Mom is in failing health and currently paying for long term care, gifting is going to be an issue for Medicaid, which will review 5 years of financial statements going back in time from the date of application. For example, if Mom made gifts 6 months before applying for Medicaid, the State will probably take issue with that since those gifts could have been used to pay for Mom’s care.

 Small gifts of $100 or so, far enough in advance of the Medicaid application may be OK.  However, if Mom has 20 children, grandchildren and great grandchildren  then the total amount is now $2000, carrying a penalty of approximately 1/3 of a month.  Keep in mind that the State adds all transfers over the 5 year lookback period together before calculating the penalty.  That’s why the frequency of transfers is an issue.

 The recipient of the gifts is important as well. Transfers to certain disabled children may be exempt from the Medicaid penalty rules.  Of course, gifting to a disabled child may not be a wise idea, depending on the nature of the disability, but the gift can be made to a special needs trust.  (See my 11/9/09 blog post)

 Finally, the source of the gifts is also key.  If the gift comes from the Medicaid applicant’s account then it will be subject to the transfer penalty.  However, if it comes from another source, for example, from a trust then it could be permissible.  Why?  Because the assets in certain types of trusts are not counted as owned by the applicant for eligibility purposes.  So when gifts are made from the trust it doesn’t count as a transfer.  It does, however, count as a transfer when the applicant puts the money into the trust.  That’s why long term care planning using trusts must be done well in advance of the possibility of needing Medicaid, not when you are on the doorstep of the nursing home.

 By doing the planning, ideally while you are still healthy, you can “have your cake and eat it too”.  Assets in the trust are there for your benefit, to pay for your long term care needs first, but you also can have the ability to make gifts to your loved ones without worrying that you’ll jeopardize your own care if you run out of money.