I find that many clients have heard about the annual gift exclusion (currently $15,000 per year) and believe it applies to Medicaid planning.
As is pointed out in this blog post, there is an annual gift exclusion for federal Estate and Gift taxation.
Now that the unified gift and estate tax exemption has jumped to $11.18 million in 2018, you may no longer have to worry about gift and estate taxes. On top of that, you can still use the annual gift tax exclusion of $15,000 per recipient in 2018.
In other words, you can give each recipient gifts valued up to $15,000 a year, thereby reducing the size of your taxable estate. For example, if you have three children and seven grandchildren, you can give each one $15,000, for a total of $150,000. If your spouse joins in the gifts, the tax-free total is doubled to $300,000. And, if you continue this pattern for five years, you’ll have reduced your taxable estate by $1.5 million gift tax free.
However, the IRS is the only agency concerned with these exclusion, Medicaid does not care. Medicaid will penalize an applicant for any amount.
Any gifts or assets transferred within 60 months of the date of application for Medicaid benefits – if, say, you need to enter a nursing home for long-term care – are subject to penalties.
Those penalties are calculated not in dollars, though, but in months – months you are ineligible for Medicaid and must use private funds. (Those funds might be yours… or could be your children’s if you do not have sufficient assets to cover your care during the penalty period.)
For example, say four years ago you gave $120,000 to your children. Since that transfer of assets was made within the five-year look back period, Medicaid will determine that those funds could have been used to pay for your care. The next step is to determine the average monthly cost of a nursing home in your area. (Every state and even every county uses different figures.)
In Suffolk County in New York, the figure used is just over $12,000 – that’s the assumed average monthly cost of a nursing home. Since the $120,000 is within the look back period, dividing $120,000 by $12,000 results in ten months of care you could have received had you not made that gift.
That means you will not be eligible for Medicaid for ten months.
