Both Medicaid and the IRS have their own set of rules about the consequences of making gifts and both apply to any gifts that you make. We often see people getting the two sets of rules confused.
The following will help you understand the different sets of rules the IRS and Medicaid apply to gifts.
IRS Rules on Gift Tax
The definition of "gift" by the IRS - Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.
While the IRS definition of what is considered a gift is very similar to that of Medicaid, how it is treated is very different.The lifetime gift exemption amount is not something that will come into play with Medicaid, the new 2015 lifetime gift exemption limits will increase to $5,430,000. Meaning you may make gifts of up to that amount during your lifetime without paying gift tax, however, such gifts must be reported to the IRS on a gift tax return. [anyone concerned with that amount is not applying for Medicaid]. In most situations, transfers of any amount to your spouse, either during lifetime or at death, are not subject to gift tax. The annual gift amount is where many people get confused with regards to Medicaid. The annual gift amount will stay at $14,000 per year, per person, without having to file a gift tax return with the IRS. You can give away $14,000 to as many individuals as you’d like. A husband and wife can each make $14,000 gifts. So a couple could make $14,000 gifts to each of their four grandchildren, for a total of $112,000.
Medicaid Rules on Gifting
The Medicaid rule regarding Disposition of Assets and Fair Consideration refers to"Gifts" or transfers of assets and is described as [when an individual, the individual's spouse or another acting on their behalf disposes of or transfers assets for less than Fair Market Value. Assets include all income and resources]. There are a few exceptions to this also which we'll review below.
If these gifts or transfers occur within 60 months of the application for Medicaid benefits, the individual may be disqualified from receiving benefits for a certain period. This is referred to as a “penalty period”. This penalty period is calculated by dividing the total value of uncompensated gifts or transfers by the penalty divisor of your state [which is equal to the average private patient cost of nursing facility care in your state at the time of application for benefits]. The result is the number of days you will have to wait until you will be eligible for Medicaid to pay for long-term care services. The ineligibility period starts to run on the day the application is otherwise approved. So, the $14,000 gift that's allowed by the IRS may count towards disqualification of Medicaid benefits.
Medicaid allows for exceptions to the Fair Consideration rule as follows;
- The individual’s spouse. 55 Pa. Code § 178.104(e)(1)(i)
- The individual's child under 21 years of age. 55 Pa. Code § 178.104(e)(1)(ii)
- The individual’s child age 21 or older who is blind or permanently and totally disabled
- The individual's spouse or to another for the sole benefit of the individual's spouse.
- Another for the sole benefit of the individual's spouse, by the individual's spouse.
- The individual's child who is under 21 years of age, or the individual’s child age 21 or older who is blind or permanently and totally disabled.
- A trust established solely for the benefit of the individual's child age 21 or older who is blind or permanently and totally disabled.
- A trust established solely for the benefit of an individual less than 65 years old who is disabled.
- NOTE: blind or permanent or total disability of the child must meet SSI criteria specified in 42 U.S.A. § 1382c(a)(3).
Although early planning is almost always best, you can preserve a significant amount of assets even if a family member is already in the nursing home with the proper tools.
Mary’s husband has been in the nursing home for two years. When he entered the facility they had $380,000 in savings and investments. Now with only $183,000 left, Mary would like to know, what can she do to get her husband approved for Medicaid benefits and preserve the money she has left.
Fortunately, Mary can purchase a Medicaid Qualified Annuity, her husband will then be eligible for Medicaid immediately and the remaining $183,000 will be preserved for her. However, Mary could have used the same tool 2 years ago when her husband entered the nursing home, which would have preserved the entire $380,000 of savings for her. [Funeral Expense Trusts may be used in conjunction with the annuity also]
Hopefully, this will help.
As with all of our posts, the above is not intended to be legal or tax advice. Medicaid and the IRS are extremely complex and confusing. We always recommend that you seek the advice of a qualified accountant and a qualified elder law attorney.
The above facts pertaining to Medicaid were derived Medicaid rule 440.8 regarding Disposition of Assets and Fair Consideration.
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