Apples and Oranges – Gift Tax Rules vs. Medicaid Qualification
Families often make one of their biggest decisions based on faulty information. We are separating facts from Medicaid long-term care fiction through our blog series “Three Big Medicaid Myths.”
Medicaid Myth #3 – Gift Tax Rules vs. Medicaid Qualification
- You can give up to $14,000 per person / per year. This one confounds many otherwise very smart folks – even accountants that tell you that you can do this. Yes, there is a federal gift tax law that says that you can gift up to $14,000 per person per year. It is called the annual exclusion. You can gift $14,000 every year to as many people as you want and not have to pay any gift tax. However, gift tax rules and Medicaid regulations are two different critters. Apples and oranges.
- The Arkansas Department of Human Services (DHS), can look back five years from the date of the Medicaid application to see what, if any, uncompensated transfers you have made. If you give any money to someone within five years of the date of filing a Medicaid application, DHS will say that this was an uncompensated transfer and will impose a penalty period. The penalty is a length of time that a person will be ineligible to receive Medicaid benefits to pay long-term care expenses.
- As an oversimplification but to illustrate the point, let’s say the average cost of nursing home care in Arkansas is $5,000 per month. The Medicaid application was filed. It comes back denied because three years ago you gave your granddaughter $5,000 as a down payment on a car. Because of this uncompensated transfer which happened 3 years ago, you will not be eligible to receive Medicaid for one more month from the date that you were otherwise qualified to start receiving assistance. This is an example of the Medicaid penalty period. Penalty doesn’t mean that you are in trouble or that you have to pay anything back. It just means that you will have to wait an extra month or months to start receiving Medicaid payments from the time that they otherwise would have begun.
- What if instead of $5,000, you gave your granddaughter $50,000? This means from the date that you were otherwise eligible to receive Medicaid benefits, it will be 10 more months before Medicaid starts paying.
- This rule is designed to benefit the state. The way the state looks at it, every $5,000 that you “gifted” someone could have been used to pay one month of your nursing home bill. It presumes that by giving away this money instead of using it for your care, your intent was to divert it for some purpose other than to pay your nursing home expense, which is a legal obligation. By delaying the receipt of Medicaid assistance, the state is requiring you to “pay back” this money by delaying the start of Medicaid vendor payments. Even though you may not have made the gift or transfer with the intent of diverting the money or “beating the system,” the burden will be on you to prove that. In most cases like this, a penalty period will be imposed and you will have to wait to receive Medicaid assistance until that penalty period has run.
If you have a loved one that is going to the nursing home soon, or one who is already there and is paying for care out-of-pocket, click here for a free workbook on nursing home crisis planning and give us a call at 501.843.9014 to arrange your free initial consultation. There may be actions that can be taken to save a substantial portion of assets.
The information provided on this blog is intended as general information only for a broad audience. It is not intended as legal advice and should not be acted upon as such. If any reader has questions or concerns about any matter mentioned herein, he/she should contact an Elder Law Attorney or other appropriate professional. If any reader has questions or suggestions about a future topic area that he/she would like to see discussed, please contact the author at firstname.lastname@example.org.