Serving Clients in Fairfield, Hartford, Litchfield and New Haven Counties

Not All Gifts Are Created Equal

It is only natural for an individual to give a gift to their children or grandchildren.  Whether it is to help pay for a loved one’s tuition, paying the down payment for the purchase of a family member’s new home, or maybe transferring that classic car you cherish to a relative.  Although we give gifts as a sign of generosity, often we forget to consider the adverse effects that gifting may have on our long-term care planning.

Many people are aware that each year they can gift a certain dollar amount; however, they may not know the reasoning or source of this guideline.  Under federal tax law, a gift tax is imposed if an individual gives property to another without receiving full value for the transferred property.  The annual exclusion from gift tax is one exception to the general rule that gifts are taxable.  The good news is that with the use of annual exclusions, individuals can give $15,000 per calendar year ($30,000 for a couple) to as many people as they want without incurring a gift tax.  The annual exclusion amount has increased over the years, but currently is at $15,000.

This sounds like a win-win situation until we start to consider consequences beyond gift tax.  Routinely, people gift assets under the annual exclusion/gift tax premise which is all well and good until long-term care costs become a concern.  If an individual suddenly needs skilled nursing care and does not have private funds to pay for his or her care, it may become necessary to apply for benefits through the state or federal government to help pay for the care (“Medicaid”).  If this ends up being the case, the annual exclusion gifts could create a problem for purposes of Medicaid eligibility.

Philosophically, the concepts of gifting and Medicaid eligibility present a proverbial tug of war.  Let’s say Mom has $500,000; why should Medicaid pay for her long-term care when she has the money to pay for it herself?  What if Mom had $500,000 and gradually gifted it to her children and grandchildren over the course of the last few years and is now in need of long-term care, should Medicaid pay for her care?

It used to be the case that once a person became eligible for Medicare or senior discounts, they would begin to plan for their long-term care needs.  Now that people are living longer, thinking about long-term care planning tends to happen later, often when planning opportunities are limited.  As the government deficit continues to grow and Congress continues to search for ways to tighten the budget, our focus on long-term care planning needs to begin sooner.  As a result of budgetary constraints over the years, Congress took pause and developed the concept that any “gift” made within the 5 years of an application for Medicaid would result in a period of ineligibility, commonly referred to as the “look-back period”.  Gifts of any amount during the 5-year period prior to application for Medicaid could cause a person to be ineligible for benefits.  The annual exclusion for gift tax purposes is not an exception to the Medicaid gifting rules.

By way of example, assume mom has 5 children and gave $15,000 to each of her children in 2021 (a total of $75,000).  She will not have any gift tax consequences as a result of the gifts because of the annual exclusion exception.  However, a year after making these gifts, mom has a debilitating stroke and requires skilled nursing care in a long-term care facility.  Mom only has enough money to cover her stay in the nursing home for 6 months.  After that, she will need to apply for Medicaid to help pay for her long-term care costs; however, because of the gifts to her children in 2021, she will not be eligible for Medicaid.

The Medicaid look-back period and gift tax considerations are related but remain different concepts. When considering whether to make gifts, it is extremely important to consider whether, by doing so, you are retaining enough money to cover your foreseeable needs.  Prior to making significant gifts, it is advisable to consult with an elder law attorney to ensure that you are considering all of the implications.

If you would like more information on this topic, please contact Attorney Alyson Marcucio at tel:(203) 902-4882.