If mom is trying to avoid losing money to nursing home expenses by giving away her remaining money before entering the nursing home, this approach won’t work.
I was talking to a concerned daughter recently who told me her mom wanted to give away $10,000 to each of her five children before she went into the nursing home. Her mom wanted to give the money to the children so that she wouldn’t lose the last $50,000 she had to nursing home expenses. The question was, how can mom give away money without being penalized. She had heard there was a $14,000 limit of some kind on gifts and wanted to discuss how this applied to her situation.
There is something called a gift tax exclusion which allows any person to give away $14,000 or less to another person without having to report that gift to the IRS. If you give away more than $14,000 to any one person, you are required to file a gift tax return. Giving away more than $14,000 does NOT mean that you automatically will pay a gift tax. In 2017, you only pay a tax if your reportable gifts total more than $5,490,000. These are all IRS rules.
When applying for Medicaid to help pay for nursing home care, you are working within Medicaid rules (not IRS rules). Medicaid rules are different and the gift tax exclusion rule under the IRS has no bearing on your Medicaid application. Medicaid rules will count any transfers that a person makes in the five years before they apply for Medicaid. You can make the argument that the gift or gifts were not made to qualify for Medicaid, but you will have to spend time and significant effort proving that to be the case.
If mom wants to give $50,000 away by giving $10,000 a piece to each of five children, she can do that and she will not have to report those gifts to the IRS because the IRS rule allows her to exclude gifts under $14,000. However, if mom applies for Medicaid within five years of making those gifts, under Medicaid rules mom will be required to report each of the five $10,000 gifts to Medicaid and they will disqualify her for coverage for the first $50,000 of her care.
If there is a chance that you or a loved one will be entering a nursing home in the future, I would recommend speaking to an attorney before gifting and before you are in the nursing home to ensure that you avoid penalties and problems and that you will experience the best results under both IRS and Medicaid rules.
Justin T. Crain is an estate planning attorney in the Plano, Texas office of Thomas Walters Estate Planning where he provides legal services including Wills, Trusts, Gun Trusts, Guardianship Administration, Probate, Estate Administration, Medicaid Planning and Nursing Home Planning to those in the surrounding areas of North Texas.