Myth: If my annual gifts are under the annual federal gift tax exclusion amount, then no penalty can be imposed by Medicaid when I later need a nursing home or home care services.
Fact: That is absolutely incorrect. Medicaid and the IRS treat “gifting” very differently and the two concepts are completely independent from one another. Giving gifts less than the federal annual gift tax exclusion amount can trigger a penalty when applying for Medicaid long term care coverage. If you are planning on applying for Medicaid coverage in the future, you will want to be very careful about gifting or transferring any assets until you speak to an elder law attorney. If you need long term care in the future and apply for Medicaid coverage, gifts you gave in the five years preceding your Medicaid application can make you ineligible for Medicaid coverage for a certain period of time, depending on how much you gave. In that case, you would be responsible for your long term care costs for a period of time before Medicaid can cover your costs.
Let’s review what the federal annual gift tax exclusion amount is and what gifting means in the context of Medicaid.
Federal Annual Gift Tax Exclusion Amount
The Internal Revenue Service (IRS) imposes a gift tax on the transfer of money or property without getting payment or fair market value in return. For example, if you “sell” a piece of property to your child for $500,000 but that property had a fair market value of $2,000,000, then you have given a gift to your child of $1,500,000. In addition, the IRS imposes an estate tax on assets transferred upon your death. Most people and particularly people seeking Medicaid coverage, never actually get hit with the federal gift or estate tax, because every person has a lifetime gift and estate tax exemption that is currently a pretty high amount. In 2023, the federal exemption for gift and estate taxes is $12.92 million, and $25.84 million for married couples combined. That means that if a person dies in 2023, and at the time of death his estate, including gifts made during his lifetime, is less than $12.92 million, his estate will not be subject to estate or gift tax. (This exemption amount is scheduled to decrease to $5 million, plus inflation, in 2026, and possibly to a lower amount and even sooner under current federal tax proposals.)
Now, what if you have assets near the federal exemption limit and would like to avoid gift and estate tax? One easy strategy is to take advantage of the federal annual gift tax exclusion, which is $17,000 per year as of 2023. This means that a person can give up to $17,000 to any amount of people this year, and it will not be deducted from his lifetime gift tax exemption amount. If you are married, as a couple you can give $34,000 to a single person. For example, one person can gift $17,000 to 10 children and grandchildren and reduce her estate by $170,000 without being subject to federal gift tax and without decreasing her lifetime gift tax exemption amount. A married couple can give double that amount.
So the strategy of giving gifts to your children and grandchildren each up to the annual federal annual gift tax exclusion amount of $17,000 for 2023, is beneficial to you if you are aiming to reduce your lifetime gift tax and estate tax liability (meaning, you have millions of dollars).
Basically, unless you expect to have a taxable estate at your death (more than $12.92 million as of now, or more than the exemption amount when it is reduced), the $17,000 annual exclusion amount is pretty irrelevant to you. (*Note: If and when the estate and gift tax laws change and amounts are reduced, this issue may become more relevant to even those planning for Medicaid. Stay tuned.)
Medicaid is a government program which pays both medical costs and long-term care costs for people who cannot afford to pay on their own. Medicaid is designed as a “payor of last resort,” so to qualify you must meet strict financial and other eligibility requirements. For a single person in 2021, New York State residents can apply for Medicaid services if their non-retirement assets are below $30,180 (there are a few exceptions to allowed assets and this limit is subject to change).
When an individual applies for Medicaid coverage, in addition to making sure that the applicant’s assets are below the Medicaid resource limit, there is a “look-back period” to see if any gifts have been made (transfers without receiving fair market value in return). The look-back period for nursing home Medicaid is five years. Until now, New York did not impose a look back for home care, but a 30-month lookback for any transfers made on or after October 1, 2020 was signed into law, although not yet implemented (currently tolled due to the federal pandemic emergency). The local Medicaid agency would review your financial documents and determine whether you transferred any property for less than its fair market value during the look-back period. If you have transferred assets during the Medicaid lookback period, a transfer penalty will be imposed and you will be ineligible for Medicaid long term care coverage for a period of time depending on how much was transferred. Basically, the idea is that Medicaid is funded by taxpayer dollars and the look-back period addresses the concern that people will quickly gift all their assets to their children or family, then seek Medicaid coverage to pay their long term care costs while their family is sitting on a pile of money.
Other than a few exceptions where transfers are exempt from transfer penalty (for example, transfers to a spouse or disabled child), transfers will be scrutinized by the local Department of Social Services (“DSS”) and can trigger a penalty. Substantial gifts for holidays, graduations, and birthdays may affect eligibility. Medicaid can treat contributions to a charity as gifts for the purposes of qualifying for Medicaid benefits. The same goes for transfers to a child, grandchild, or any other uncompensated transfer.
Although the IRS would not impose a gift tax for gifts in a given year below $17,000, such gifts could be scrutinized by Medicaid and, a transfer penalty can be triggered for these gifts.
Don’t assume that a transfer that will benefit you under federal tax laws will be safe under Medicaid eligibility rules. Such gifts will likely be a problem.
The federal annual gift tax exclusion is not an exempt transfer from the Medicaid look-back period. Giving gifts, even under the federal annual gift tax exclusion amount, within five years of applying for Medicaid long term care, may have serious impact on Medicaid eligibility.
Most people who are planning to apply for Medicaid long term care coverage may never reach the lifetime gift and estate tax exemption amount (at the current exemption amounts). For a person whose estate would not be subject to gift tax or estate tax upon his or her death, utilizing the annual gift tax exclusion amount each year is quite irrelevant! For people well under these limits, it is much more relevant to make sure they will be eligible for Medicaid coverage when they need it. These annual gifts can hurt Medicaid eligibility.
With all that said, if you do not expect to need Medicaid soon and want to gift assets to your children, grandchildren, or other loved ones, that is always your choice. There just may be certain penalties down the road if you apply for Medicaid coverage, depending on the circumstances of the gift.
All of this information may be a lot to take in at once. If you are considering giving gifts and haven’t though about how you will pay for long term care if you need it, it is important that you speak to an experienced elder law attorney.