In the early stages of dementia, Morris* wanted to start preparing for long-term care — perhaps in an assisted living or memory care center. Without first getting legal advice, he started gifting about $15,000 per year to his three children. Three years later, after gifting $45,000 a year, he didn’t understand why he wasn’t eligible for Medicaid.
What Morris didn’t understand is that the clock on the five-year Medicaid “look-back” period for eligibility resets every time a gift is made. The confusion Morris experienced is common because people don’t understand that the federal gift tax laws are different and separate from Medicaid requirements.
Understanding the Federal Gift Tax Exemption and Medicaid Spenddowns
The federal gift tax exemption allows individuals to give a certain amount of money to others each year without incurring a tax or needing to report it to the IRS. In 2025, for example, this annual exclusion amount is $19,000 per recipient. Additionally, there is a lifetime exemption — currently over $13 million — that applies to cumulative taxable gifts beyond the annual exclusion. While this exemption is useful for estate tax planning, it is not allowable under Medicaid regulations.
Medicaid has strict income and asset limits for qualification. If an applicant has given away assets within five years of applying (known as the “look-back” period) those gifts can result in a penalty, which delays eligibility for Medicaid benefits.
Steps to Preserve Medicaid Eligibility While Gifting Assets
To avoid issues like the one Morris encountered, individuals looking to protect their assets while qualifying for Medicaid should consider the following steps:
1. Gifting Strategically – Instead of giving away small amounts over several years, which resets the five-year look-back period each time, consider gifting a lump sum well in advance of needing Medicaid. This allows the five-year period to run out before applying for benefits.
2. Using an Irrevocable Trust – Transferring assets into a properly structured irrevocable trust can help protect them from Medicaid spenddown requirements. Since assets placed in an irrevocable trust more than five years before applying for Medicaid are not counted as part of one’s resources, this can be an effective planning tool.
3. Consulting an Experienced Estate Planning Attorney – Medicaid rules are complex and vary by state. An estate planning attorney who understands Medicaid eligibility, tax laws and long-term care planning can help structure a gifting strategy that avoids penalties and preserves assets for loved ones.
4. Considering Other Spenddown Strategies – Instead of outright gifting, individuals can use Medicaid-compliant annuities, prepay funeral expenses or make qualified purchases that legally reduce countable assets while maintaining eligibility.
By planning ahead and understanding both tax laws and Medicaid regulations, individuals can ensure they are financially prepared for long-term care without unnecessary delays in receiving benefits.
Contact the experienced estate and Medicaid planning attorneys at TREEL today to discuss your options and create a plan that ensures Medicaid eligibility while preserving your financial legacy.
*Names and some details have been changed to protect the client’s privacy.
