The New Medicaid Gift Rules
There have been a number of changes to the Medicaid rules over the last year. The most significant changes relate to the impact that making a gift has on a person’s ability to qualify for nursing home Medicaid benefits. If you or anyone you know may need to apply for nursing home Medicaid benefits in the future, you should be aware of these rule changes.
Medicaid Gifting Basics
Many of our clients are under the impression that if they’ve given away any assets within the last three years, they are precluded from applying for Medicaid benefits at all. The truth is that the gift may have an impact upon a person’s ability to qualify for Medicaid for a certain period of time, but does not generally preclude them from ever receiving such benefits.
Prior to February 8, 2006, the state would look back three years to see if you made a gift, which they call a “divestment”, and would impose a penalty period during which you would not be eligible for Medicaid benefits because of the gift. After February 8, 2006, that look back period is five years.
The penalty imposed for making a gift under the Medicaid rules, is the value of the gift divided by the average monthly cost of nursing home care in
IRS Gift Tax Rules vs. Medicaid Gift Rules
Many people are informed by their tax advisers that they are able to give away up to $12,000 per year to as many people as they want without having to pay gift taxes. While this is sound tax advice, these same gifts could create significant penalties under the Medicaid rules. For example, if a person made a gift of $10,000 to their two children, they would have no obligation to pay gift taxes, but the gifts would create a Medicaid penalty period of greater than three months.
Presumption of Divestment
The state presumes that all transfers not for value are, in fact, gifts and create a divestment penalty. A penalty period will not be imposed, only if the applicant can show that the transfer was “exclusively for a purpose other than to qualify or remain eligible for [Medicaid]”, which requires them to prove that they had no reason to believe long-term care services might be needed. A person’s age and medical condition can have a great impact on being able to substantiate this. Avoiding probate and preserving your estate are not valid reasons.
Exactly how gifts for birthdays, graduations, weddings, or to your church or charity will be treated by the state under these new rules as yet unclear. The state is indicated that they will be making a rule change in October of this year that would allow them to impose a gift even afford “de minimus” small gifts which they may consider to be for the purposes of qualifying for Medicaid. Under the old rules, such small gifts do not create a penalty even if they were for the purposes of qualifying for Medicaid.
The new rules also allow for aggregation of gifts during the five year look back period. For example, if a person made a total of $20,000 in gifts during a five-year period of time, the Medicaid rules treat those as one, big gift creating a penalty of greater than three months.
Delay of the Penalty Start Date
For gifts prior to February 8, 2006, the penalty period begins to run as soon as the gift was made. For gifts after on or February 8, 2006, the penalty period does not begin to run until the person is “otherwise eligible” for Medicaid, is receiving nursing home level care, and has applied for Medicaid. Therefore, careful planning must be done if someone makes a gift to make sure that they are otherwise eligible for Medicaid and that they apply for those benefits. Failure to do so could result in the delay of the penalty period beginning to run.
Reversing the Penalty Period
Prior to July 1, 2008, if a person made a gift, which created a penalty period, the return of some or all of that money could reverse the penalty period partially or completely. After July 1, 2008, the penalty period can only be reversed by a complete return of the gift. Now, more than ever, if gifts are made to preserve someone’s assets, the assets should be retained in a consolidated account or placed in some type of “family trust”, should the recipient’s wish to return the funds.
Planning Opportunities Still Exist
Despite these significant changes, there are still many planning opportunities involving gifting for a single individual and married couples applying for nursing home Medicaid assistance. For instance, there are a number of types of transfers which do not created a penalty period at all. Even if a transfer creates a penalty period, there are methods by which a requisite income stream can be provided to the Medicaid applicant to cover their care costs while the penalty period is being served, after which the gifted funds are preserved.