Gift Tax Confusion
Where Tax Law and Medicaid Law Meet
By Liz Perry
Both Medicaid and the IRS have their own set of rules about the consequences of making gifts. Both sets of rules apply to any gifts you make. In my practice and when I am teaching classes, I often see people getting the two sets of rules confused. The reality is that anyone concerned about qualifying for Medicaid will rarely be impacted by gift tax. That is because gift tax is only payable once a person’s lifetime gifts have exceeded $5,490,000. A person who has at least five million dollars worth of assets will normally not be applying for Medicaid.
The following explanation will help you understand the different sets of rules the IRS and Medicaid apply to gifts.
IRS Rules on Gifting
During 2017, you may make gifts of up to $5,490,000 during lifetime without paying gift tax; however, such gifts must be reported to the IRS on a gift tax return. In most situations, transfers of any amount to your spouse – either during lifetime or at death – are not subject to gift tax.
In addition to giving $5,490,000 worth of gifts in 2017 without paying gift tax, you may also give $14,000 per year, per donee, without filing a gift tax return with the IRS.
Another thing to be aware of as you are analyzing the tax rules of gifting is that there can be an income tax consequence to making gifts. Many times it is better for your children to inherit property from you than for you to give it to them while you are alive. This is because your children will take your income tax basis on property you give them, but will get a new basis equal to the property’s fair market value on death for assets they inherit from you. This can dramatically reduce potential capital gains tax liability for your heirs.
Medicaid Rules on Gifting
If you make gifts to anyone other than your spouse (with a few exceptions) within 60 months of your applying for Medicaid, you will be disqualified from receiving Medicaid for a certain period. The period of disqualification before you can qualify for Medicaid is calculated by dividing the total gifts made in a month by the average daily cost of nursing home care (which as of October, 2016 is $297 per day) and rounding down to the next whole number. The result is the number of days you will have to wait after you would be otherwise eligible for Medicaid to pay for long-term care services based on an application approved by the Department of Social and Health Services.
As you can see, under the Medicaid rules even $14,000 gifts count towards disqualifying you from receiving Medicaid. If you give $70,000 to one person (which uses part of your lifetime exclusion amount) or if you give $14,000 to five people (which does not use part of your $5,490,000 gift exclusion), it is all the same – both sets of gifts will create a period of ineligibility for your receiving Medicaid. Medicaid simply adds up the total amount of gifts made within the last five years and divides by the average cost of nursing home care to come up with the total amount of time you are ineligible for Medicaid. The ineligibility period starts to run on the day the application is otherwise approved.
You should note that the one area that Medicaid and gift tax rules are the same is that under both the Medicaid and gift tax rules there usually is no penalty for making gifts to your spouse.
Hopefully, the above discussion will help you think your way through how both the IRS and the Department of Social and Health Services analyze the consequences of gifting. You should remember that many times there is enough at stake that it is worthwhile to review the pros and cons of a gifting strategy with an experienced elder law attorney knowledgeable about Medicaid and tax law before making significant gifts to your family.
Elizabeth A. Perry, a member of the National Academy of Elder Law Attorneys, has been helping Clark County residents with their estate planning needs for over 20 years. Her practice emphasizes wills, trusts, probate and Medicaid planning. You are invited to call her to schedule an appointment or sign up for a class at (360) 816-2485. ©Liz Perry 2016
(The above should not be construed as specific legal advice and is intended for general information purposes only)