Medicaid Planning for Long-Term Care - Part 3 - Giving Away Money

Posted By Jorgensen, Brownell & Pepin, P.C.

22 Apr. 2016

Making gifts to qualify for Medicaid: for some this option can be controversial but for many it is a viable option. The important thing to remember is that the Medicaid rules allow for some gifting. But the rules are not easy.

The “Look Back” Period and the Penalty Period

Medicaid obviously does not want a person to give away all of their money and possessions and then qualify for government benefits. Therefore, although some gifting of assets is allowed, they come with a catch. The first catch to beware of is the “look back” period. This rule allows Medicaid to go back five years from the date of the application and see if any gifts were made. For example, if a Medicaid application is files May 1, 2016, any gifts made between May 1, 2011, to May 1, 2016, are fair game for Medicaid to impose a “penalty period.” It is important to remember that the look back period and the penalty period are not the same. Even if a gift was made during the look back period, that does not mean that the person must wait the full five years before qualifying for Medicaid.

So what is the penalty period? The idea behind the penalty period is that had the Medicaid applicant not made the gift, that money would have been available for the person’s medical costs which would have saved the government money. As a penalty for making the gift, Medicaid will make the person wait a certain amount of time before being eligible for benefits. The time is calculated by dividing the value of the gift by the average cost of long-term care. This is the penalty factor and it changes each year. The result is the number of months and days that the Medicaid applicant must wait before being allowed to receive benefits. Here is where things get tricky: the penalty period starts to run only when the applicant is at or below the $2,000.00 asset limit (for a couple, the asset limit is $119,220.00 or less). The problem, of course, is how will the person pay for their medical care if the assets are all spent? Even for a couple, it is not a good idea to spend any more of the $119,220.00 resource allowance than is necessary. This problem is solved by placing money into a Medicaid compliant annuity that will pay an amount each month that will cover the cost of care during the penalty period.

Knowing how much to gift, what the resulting penalty will be, and what amount should be placed into an annuity requires individualized calculations based on income, cost of care, and total assets. Timing is also critical as you want the annuity to begin paying on the same day that assets are at or below the asset limit. We have developed gifting models that can run these numbers and provide several different strategies for clients.

What About the Tax Rule that Limits the Amount of Gifts?

Clients frequently ask about the tax law limit on making gifts. As a practical matter, and without going into great detail on gift tax rules, unless your net worth is over $5 million, you do not need to worry about a limit for making gifts.

Planning Opportunities

For gifts to work, the rules must be followed and the timing needs to be precise. Give us a call today to consult with our experienced elder law attorneys.

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