Aging Options

What's the difference between gifting for tax purposes and Medicaid gifting?

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People get two forms of gifting confused.  The first form of gifting involves estate taxes.  The second involves Medicaid.  It’s important to recognize that there are big differences between the two of them and that gifting in one way will affect your taxes and gifting in the other will determine whether or not you’ll have a penalty period.

  • What is the Gift-Tax

The U.S. imposes a tax on gifting money or property to others.  That tax works in combination with the Estate Tax.   During the course of a person’s life, they are able to gift up to $5.34 million (federal) or $2.012 million (WA state) in 2014.  The Gift-Tax applies to transfers during your life; the Estate Tax applies to transfers after your death.  The Gift-Tax is imposed on the giver; the Estate Tax is imposed on the estate.  The gift recipient never pays taxes on the gift except under special arrangement.

If your total assets never approach the state or federal limits, you’ll never be subject to Gift-Tax.

There is an annual limit of $14,000 per individual, there are no limits as to how many individuals you can choose to gift that amount to.  As long as you remain within that limit, you can avoid any Gift-Tax or Estate Tax consequences.  This means for instance that if you want to give your son, your daughter-in-law and their three children money, you can give the family $70,000 in total (with separate checks for each member).  What’s more, because that limit is based on a single individual, if you are married, your spouse can also give your son’s family $70,000 as well.

If you give more than $14,000 to an individual, you’ll have to file a Gift-Tax return and report the gift to the IRS.  The IRS will add up all of your gifts that have been reported this way and if some day your total gifts exceed the limit, you will then owe taxes on gifts over the annual exemption.

That’s the gifting that people need to be aware of for tax purposes.

  • What is gifting in connection with Medicaid?

Then there’s gifting in respect to Medicaid.  Originally, the government intended Medicaid to provide health care for the poor but it has also become a source of financial assistance for Long-Term Care for middle-income families.  To qualify for Medicaid, an individual’s resources must not exceed certain eligibility requirements.  Those resources include items such as a car or a house but they also include money.  It’s not against the law to give assets away in order to qualify for Medicaid.  It’s against the law to not report the transfer of assets in order to qualify for Medicaid.

If you give assets away in order to qualify, Medicaid imposes a period of ineligibility.  People often become confused and think that the period of ineligibility is five years.  That is because there is a period in which Medicaid looks to see if you have given away assets that could have been used to pay for care.  That period is five years and is therefore called the five-year look back.  If you are planning to give away assets in order to qualify for Medicaid, you want to do so at least five years from when you are likely to need to qualify for Medicaid.

If you give away assets within that look back period, Medicaid imposes a penalty referred to as a period of ineligibility.  That period is tied to the amount given away.  So for instance, if you give away $10,000, Medicaid looks to see how much one month of care would have cost (this number varies by state).  If you lived in a state in which a month of care was equated to $5,000, you would be ineligible to have Medicaid pay for your care for two months.  This can be a problem in that your care might actually exceed the amount Medicaid assigns as a value for a nursing home stay for one month.  If, for instance, you were actually charged $12,000 per month for care, you still would have to wait two months before Medicaid would pick up the tab.  That means that a gift of $10,000 could in this case end up costing you $24,000.

Gifting doesn’t just include money however.  Suppose you decide that you want your daughter to have your home so you sign over title to your home.  Again, it’s not against the law to gift your daughter your home.  But, if you do so within that five-year look back period, Medicaid will look at the transfer to your daughter.  If you didn’t receive fair-market value for that asset, Medicaid will assign a transfer penalty.  Medicaid looks at all transfers, including transfers to charities, gifts for weddings, holidays etc or forgiveness of a debt.

  • What gifting is allowed?

Some transfers are exempt.  Those transfers include any gifts to a spouse, a disabled or blind child or to a trust for the sole benefit of anyone under age 65 who is permanently disabled.  You can also transfer a home to:

  1. a child under the age of 21;
  2. any caretaker child who has provided services that prevented you from entering a nursing home for two years or more; or
  3. a sibling with an equity interest in the house who has lived with you for at least a year before you moved to a nursing home.
  •  How joint accounts affect Medicaid

If you’re receiving care from someone, you may have considered adding the caregiver’s name to your bank account or to the title of your house.  Here’s a few reasons that doing so might backfire if you need to apply for Medicaid.

When determining benefits, the state adds up the value of the assets in the beneficiary’s name.  That value includes 100 percent of the value of all joint bank accounts except for any value identified and proved as contributed by the other individual.  Since the entire value of the account is considered owned by the beneficiary, the state does not consider its value to be a gift but it will be counted for the purposes of determining Medicaid eligibility.  This rule stands if the account is titled in the name of the parent OR child.  If instead, the account is in the name of the parent AND child (such that both signatures must be used to withdraw money from the account), then the entire value of the account is considered a gift from parent to child.

One exception to that rule is if the account is payable on death (POD) or transferred on death (TOD)since the ownership does not transfer until the current owner’s death.

One solution for transferring cash to a caregiving child is to draw up a caregiving agreement to pay the child for services.  Such agreements must pay the current rate for caregivers (so no you can’t pay your child $50 an hour to drive you to the doctor’s office).

  • How tenancy affects Medicaid

In an effort to avoid probate, some parents will add children to their assets as joint tenants.  Medicaid treats real estate differently than bank accounts.  If a parent adds a child’s name to a deed, Medicaid views that addition as a transfer of 50 percent of the value of the house to that child.  If instead the parent chooses to add the child to a deed using a joint tenancy with rights of survivorship, Medicaid will consider that the parent still owns 100 percent of the assets.

Adding a spouse to the deed is the one exception to this rule.  When an individual applies for Medicaid, the state looks at and includes the assets from both parties in a marriage regardless of whose name is on the deed.

  • What’s the  solution?

Since Medicaid rules vary from state to state, talk to an Elder Law Attorney in your state for the planning tools available for your circumstances.

Need assistance planning for your successful retirement? Give us a call! 1.877.762.4464

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