To Gift or Not to Gift
Joe calls me because he wants to understand how Medicaid works. I start to explain how you have to spend down your assets before you can qualify for benefits. That the spend down has to be for value, meaning that you are spending your money and receiving something of equal value in product or service in return. Joe listens and then perks up. "Wait a second", he says. "I can make a gift of $10,000 per person so that doesnât count, right?". "Wrong", I reply.
What Joe has done is make a very common mistake by confusing the annual gift tax exclusion with the Medicaid rules. So letâs run through the basics and clear it up. Gift tax is paid when you make a sizable gift to someone who isnât your spouse. One of the purposes of the gift tax law is to protect the estate tax. For example, if I know that my estate of $2,000,000 will be taxed when I die, then why donât I just transfer all my assets to my loved ones shortly before I die. The gift tax eliminates this estate tax avoidance strategy.
A certain amount, however, is exempt from the gift tax. There is a lifetime exclusion of $1,000,000, meaning I can transfer up to that amount, in one lump sum or in smaller increments, over my lifetime. In addition, I can gift up to $13,000 per person per year (everyone remembers it as $10,000, but several years back an inflation adjustment was added so the number now is $13,000). Yes, there is no gift tax owed when you make that gift but it does carry a Medicaid transfer penalty.
How so? Because the gift tax rules have nothing to do with the Medicaid rules. On the one hand, the government is telling us its OK to gift some amount of money without paying tax, but only up to a point. On the other hand, if we need nursing home care the government doesnât want to pay for that care unless we spend all of our own money on that care first.
Every $13,000 gift, therefore, carries a Medicaid transfer penalty, a period during which you are not eligible for Medicaid. That penalty, expressed in months, is calculated by taking the transfer for less than fair value (the gift, as we have been discussing) and dividing by the average monthly cost of nursing home care. This number is set by each state and in some states it varies by region. Here in New Jersey that number right now is $7282. This means every $13,000 tax free gift carries a Medicaid penalty of almost 2 months.
Now, does that mean that you should never make gifts? No, not necessarily. It just means that in todayâs increasingly complicated world, you have to understand that making those gifts can result in long term consequences, which you may not recognize until itâs too late. Thatâs why a carefully thought out long term care plan is critical and getting the proper advice and guidance well before that care is needed is always the best approach.