GIFTING CONFUSION: MEDICAID V. ESTATE PLANNING

Perhaps one of the most common misunderstandings of the law that I hear from my clients involves gifting as it relates to Medicaid planning and estate planning.  Many clients ask:  “can’t I give my children or grandchildren $10,000 per year without worrying about Medicaid should I need to go into a nursing home?”  The answer to that question is “NO”, and the question arises from confusion about the fact that the Medicaid gifting laws are very different than the estate and gift tax laws. 

The “$10,000 question” (sounds like an old game show, doesn’t it?) comes from an old version of the annual gift tax exclusion laws which allowed each person to gift up to $10,000 per person per year without having to file or pay any gift tax on that gift. 

During the past few years, Congress has increased that annual exclusion amount to $13,000 per person per year. I often recommend that some clients consider making annual exclusion gifts of $13,000 per beneficiary per year for estate tax planning, meaning that those gifted amounts are removed from the client’s “taxable estate” and perhaps save their estate tens of thousands of dollars in New Jersey or federal estate taxes.  This estate tax planning gifting option works well for those clients who have enough wealth to worry about estate taxes – such as if their net worth is over $675,000 – and are unlikely to qualify for Medicaid benefits (which is a program that only makes the poor eligible) because of their wealth.  And those gifts of no more than $13,000 do not count towards that person’s lifetime gift tax exclusion, which Congress set last year at $5 million per person.

But one of the reasons that the annual exclusion gifts of $13,000 per person per year can be a problem under the Medicaid laws is that those gifts do count under the Medicaid gifting laws if the person making the gifts applies for Medicaid benefits within 5 years of the date(s) of the gift(s).  That 5-year period is called the “look back period” and if client John Jones gives money away in the 5 years before he applies for Medicaid benefits, Medicaid will penalize him by not making him eligible for some period of time, depending on the amount that Mr. Jones gave away.  And even worse, if Mr. Jones gave away $13,000 per person per year for several years – which is good estate and gift tax planning – and then he becomes ill, spends down his remaining funds and applies for Medicaid benefits, all those gifts that he made within 5 years of his application for Medicaid will be aggregated together to create an even longer penalty or disqualification period under the Medicaid laws.