Guest Blog by Lauren A. Weldon
Margolis, Weldon LLC - Estate Planning & Elder Law
Although the title of this article implies that gifting can be done and still qualify for Medicaid, the truth is actually far more complicated. Medicaid has very detailed rules regarding any gifts or transfers for less than fair market value made by an applicant within the 5-year period prior to filing a Medicaid application (“look-back period”).
If an applicant makes a gift within the 5-year period prior to the applying for Medicaid benefits, the Department of Human Services or DHS (the government agency that administers the Medicaid program for long term care) will assess a penalty against the applicant based on the amount of the gift(s). If DHS assesses a penalty against an applicant, the applicant will not be eligible for Medicaid benefits during the time period of the penalty. So, the applicant will not be able to have Medicaid pay for care in a nursing home or supportive living facility (the two types of long term care facilities in Illinois that accept Medicaid) during the penalty.
The applicant or applicant’s family is typically responsible for paying for the long term care community during any penalty periods. If there are no funds with which to pay a penalty, a long term care community may not accept the applicant as a resident, thus making it difficult to find a long term care living arrangement for the applicant and his or her family. To provide some context, at the point when a single individual is applying for benefits, the applicant can have no more than $2,000 in total assets in the applicant’s name.
DHS calculates the penalty by adding all gifts made by the applicant or the applicant’s spouse within the look-back period and dividing that number by the applicant’s monthly cost of care. If the applicant resides in a supportive living facility, DHS uses a special penalty divisor when calculating the cost of care.
For example, if Doris, a Medicaid applicant who lives in a nursing home, made a $15,000 gift to her son in 2014, a $1,000 gift to her niece in 2015, and annual Christmas and birthday gifts to her family each year from 2014-2018 totaling $1,500, DHS would add these gift amounts to calculate the penalty they would assess against Doris, or $17,500.00. The penalty period would be calculated by taking $17,500 and dividing it by the daily cost of care at Doris’ nursing home, or in this case $261.00/day. Thus, the penalty period would be 67.05 days or a little over two months. During this time period, Doris would not be eligible for Medicaid benefits.
But what about the $15,000 gift exclusion that people sometimes hear their friends and neighbors talking about? The $15,000 figure is a Federal Gift Tax Exemption, meaning the IRS allows people to make gifts of no more than $15,000 to any person in a given tax year without having those gifts affect the donors’ lifetime gift exemption amount. Importantly, the $15,000 a year exclusion relates only to the IRS and does not impact Medicaid eligibility. Both the IRS and DHS have rules that govern what an individual taxpayer or Medicaid applicant can do or can’t do and still qualify for favorable tax treatment or Medicaid benefits.
These two systems and rules are completely separate from one another, and each has no bearing on the other. You can gift $15,000 a year and not have it affect your taxes, but it may affect your Medicaid eligibility. In our example, Doris gifted $15,000 to her son in 2014. While that may not have resulted in a penalty for IRS purposes, as you can see, it did result in a penalty for Medicaid purposes.
The moral of the story is to consult with an elder law attorney before making any gifts if you or your loved ones are considering applying for Medicaid at all within the next five years.
If you would like more information, you can contact Lauren A. Weldon at:
Margolis Weldon LLC
350 S. Northwest Highway, Suite 300
Park Ridge, Illinois 60068