People usually make gifts for three reasons—because they want to provide for the recipient, because they want to protect assets, or minimize tax liability. However, gifting in one’s elder years can have expensive and unintended consequences, as reported in the article “IRS standards for gifting differ from Medicaid” from The News-Enterprise, especially with Medicaid.
As a quick aside, if you’ve read any of my articles on gifting, you know I preach caution. Way too many people make gifts because of a perceived benefit, and don’t consult a professional to determine whether there is a benefit. That said, for the purposes of this article, I’m going to focus on Medicaid gift tax consequences as opposed to all of the other pros and cons in making gifts.
A primary reason for most people to make gifts is tax planning. The IRS gift tax becomes expensive, if gifts are large. However, each individual has a lifetime gift exemption and, as of this writing, it is $12.06 million, which is historically high. A married couple may make a gift of $24.12 million. Most people don’t get anywhere near these levels. Those who do are advised to do estate and tax planning to protect their assets.
The IRS also allows an annual exemption. For 2022, the annual exemption is $16,000 per person. Anyone can gift up to $16,000 per person and to multiple people, without reducing their lifetime exemption.
However, the more real danger is the effect of a gift on Medicaid or long-term care benefits. People, and frequently financial advisors and non-attorney professionals, often confuse the IRS annual exclusion with Medicaid requirements for eligibility. IRS gift tax rules are totally different from Medicaid rules.
Medicaid does not offer an annual gift exclusion. Medicaid penalizes any gift made within 60 months before applying to Medicaid, unless there has been a specific exception. The Veterans Administration may also penalize gifts made within 36 months before applying for certain VA programs based on eligibility.
For Medicaid purposes, gifts include outright gifts to individuals, selling property for less than fair market value, transferring assets to an irrevocable trust, or giving away partial interests. Some gifts are expressly permitted, such as gifts between spouses. Also, most states have some species of an exception for very small gifts, but that definition varies widely.
For example, in Texas there is no exception for small gifts. However, Medicaid staff is instructed not to inquire into potential gift transactions for less than $200 total in a month. That doesn’t create a strategy of gifting typically, but it avoids Medicaid penalties when Grandma gives $50 to a grandchild for their birthday.
The penalty for gifting in Medicaid is a penalty period. In short, Medicaid looks at your eligibility, and once otherwise eligible will calculate a penalty period by dividing the value of your gifts by a penalty rate based upon the daily average cost of a nursing home in the year of the gift. So, if you gave away $50,000 and the penalty rate is $250 per day, you are ineligible for 200 days. During this time you’ll have to find a way to pay yourself before Medicaid will.
So, gifting where Medicaid may be an issue in the future often has very real and dangerous consequences. That doesn’t mean gifting can’t be useful in Medicaid, as sometimes gifting is an express strategy for eligibility, but anyone making gifts should do so at the advice of an attorney.
Reference: The News-Enterprise (Aug. 6, 2022) “IRS standards for gifting differ from Medicaid”