Know the Medicaid Rules before giving away assets or real property
Not too long ago I had a client get angry when I cautioned him about his mother making gifts of money to him. His response was “she worked for it, she saved it, it’s a free country and she should be able to do whatever she wants with her money”. I completely agreed with him and told him that we live in a free country. But our free country has Medicaid rules which would impose a penalty for every dollar she “divested” (gifted) to him or any other person in the last five years. To make matters worse, we were having this conversation in the nursing home that his mother was living in and likely to remain. This meant that any gifts she had already given to him in the previous five years would potentially be considered divestments under the Medicaid rules.
Another very common statement I hear from clients is “I can give away ten thousand dollars to each of my children every year”. The vast majority of individuals assume that the federal tax laws with respect to gifts apply to the Medicaid rules. They do not. This simply means that parents can gift up to fourteen thousand (as of 2016) INCOME tax free each year to their children and other family members. Medicaid will treat the same gift as a divestment and calculate a penalty based upon the gift amount and the current average daily nursing home rate.
What does Medicaid consider a divestment? Divestments include anything transferred or sold for less than fair market value. This means cash gifts. However, if an individual or couple had a pattern of charitable gifting or gifting to family members (i.e., birthdays, graduations, weddings, etc.) prior to the five year look-back period, similar transfers during the last five years would not be considered divestments. However, these gifts are limited to no more than 15 percent of the individual’s or couple’s annual gross income. Additionally, I often hear the following: “It is not a gift if l sell my house or property for a dollar or at a discount?” This is considered a transfer for less than fair market value and the divestment amount will be the difference between the fair market value at time of transfer and the amount that was paid. These are just two of the most common divestment situations. The Medicaid rules include many more types of divestments.
What is the penalty? The penalty is the number of days that the divestment amount (adding all cash gifts or value of property transferred in the last five years) would have paid for nursing home care. It is based upon the average daily cost of nursing home care as determined by the State (currently $252.95 per day). For example, a person has gifted $50,000. The penalty period would be $50,000 divided by $252.95 which would be 198 days. In other words, unless the entire gift amount is returned, the family or someone will have to pay for the cost of care for 198 days before the State will begin paying.
While this article discusses the basic concepts regarding Medicaid and gifting, it is highly recommended that every family seek legal assistance from an attorney that is familiar with the Medicaid rules.