Gifting: the Grinch that stole Grandma's Medicaid
By Mike Anthony
‘Tis the season for holiday gifting. Between Hanukkah and Christmas, more gifts are given in the United States during this month than any time throughout the year. I thought it only appropriate to do a reminder for all the advisors out there on how the gifting limits for Medicaid can turn Grandma’s good intentions into the Nightmare Before Christmas.
Gifting away assets can cause serious problems when attempting to qualify for long-term care Medicaid.
The punitive Medicaid asset transfer rules are some of the harshest and cruelest rules ever imposed by the government against its ailing seniors. An improper transfer can cause serious penalties that can leave a patient’s family scrambling to figure out how to cover the cost of long-term care. Improper gifting can come in a number of different ways:
- Giving away an asset to someone who is not an exempt recipient
- Selling an asset for less than its fair-market value
- Adding a person’s name to an asset (for example: adding your children as joint owners on your property deed)
- Purchasing an annuity which is not Medicaid compliant
- Paying a child for home care or assistance without a valid personal service contract
- Making a loan to a friend or family member with a promissory note that is not Medicaid compliant
- Refusing to take an inheritance that is left to you through a will or a trust
Many people get confused and think that the $14,000 per person, per year gift tax exclusion is the allowable gifting limit for Medicaid transfers. We frequently find that people give assets away under the misconception that if the gifts are less than the $14,000 gift tax limit, they will not be penalized if the need arises for long-term care Medicaid. While some states do overlook de minimis gifts (i.e., small gifts usually under $500 or a pre-set limit that the Medicaid caseworker is allowed to overlook), all improper transfers within the look-back period are added up and used to determine the penalty period.
For example: A grandmother decides to gift each of her four grandchildren $14,000 a year, thinking that it will not cause a penalty. She has been doing this for the last seven years and now needs long-term care. Once she is eligible to apply for Medicaid, the state will ask for disclosure of all transfers within the look-back period. In this case, she’s gifted $56,000 a year in each of the look-back years, for a total of $280,000. In most states, she would be ineligible for Medicaid for well over three years after she’s otherwise broke. The look-back period
The Deficit Reduction Act of 2005 expanded the look-back period from three years to five years. Almost every state has adopted or is in the process of adopting this rule.¹ The look-back period is based upon when a person applies for Medicaid and is “otherwise eligible.” To be “otherwise eligible,” a person must:
- be in a care facility that accepts Medicaid payments and medically need the care;
- not have enough income each month to pay for the cost of care; and
- qualify financially — the patient’s available resources (i.e., those assets that count towards eligibility) must be below the state resource limit, which is usually $2,000 in most states for a single patient and varies for married couples.
Not only are the gifting rules difficult to understand, but the penalties associated with the gifts are cumbersome, to say the least. Penalty periods start when the patient is otherwise eligible. They are calculated by adding up all the gifts within the last five years prior to the Medicaid application. Each state must determine the average cost of care in the state or by region and use that figure each year to set the penalty divisor. The total gifts are divided by the penalty divisor and used to determine the total number of days of ineligibility. Some states use a daily divisor and some use a monthly divisor. Those that use monthly divisors cannot round up or down and must pro-rate the month.
Monthly divisor example: The patient has gifted $49,000 over the last five years, and the monthly penalty divisor in his state is $6,350. To calculate the penalty period, divide $49,000 by $6,350. The total penalty period is 7.71 months or seven months and 21 days.
Daily divisor example: A patient has gifted $33,000 over the last five years and the daily penalty divisor in her state is $224. To calculate the penalty period, divide $33,000 by $224. The total penalty is 147 days or roughly five months of care. Undue hardship waivers
If someone has given away money that cannot be recovered, then they can ask the state for an undue hardship waiver so that Medicaid will waive the penalty period. The requirements to get an undue hardship waiver have been set very high. Most states require that all legal options be fully pursued to recover the improperly transferred assets. A person requesting a hardship exhausted all legal remedies to collect, re-convey or recover the improperly transferred assets. By legal remedies, that usually means that the patient (or the patient’s agent) must legally pursue a claim against any person who received the moneys and attempt to get them back. For the lady in the example above who gifted $14,000 a month to her grandchildren, that means she will have to sue each of the grandchildren to try to get the money back before the state will even consider granting her an undue hardship waiver.
Silver linings playbook
There are several silver linings to the punitive long-term care Medicaid asset transfer rules that you should have in your playbook:
- Reverse half-a-loaf: The rules allow for curing a penalty by re-conveying assets. This can be helpful when trying to protect assets for a single individual because a portion of the assets can be returned to pay for care, while a portion are retained by the gift recipient. This can often lead to a savings of approximately 50 percent to 55 percent of the total asset amount. This does not work in all states because some states require all assets to be returned before they recalculate the penalty period.
- Half-a-loaf with a Medicaid qualified annuity: The ability to gift about half of the asset base away and pay through the penalty period with a Medicaid qualified annuity is a rather helpful strategy. The penalty period causes the patient to pay privately for a period of time. The use of the Medicaid qualified annuity can take the other half of the assets and convert them into an income for that same period of time. As long as the total of all incomes is still less than the cost of care, the penalty period starts to run.
- Exempt gifts: Not all gifts are considered improper transfers. Some people can receive unlimited gifts without triggering a penalty period. Additionally, gifts not made in anticipation of qualifying for Medicaid can be challenged on the basis that they were not intending to artificially impoverish the patient for Medicaid eligibility purposes when there was no likelihood that the patient would need care at the time of the gift.
- Planning ahead: If you want to be prepared, it is often very helpful to use the gifting rules to your advantage. Only gifts within the five-year look-back period are counted. Gifts of any size prior to that are ignored completely. While some choose to give gifts to a person, often the gifts are put in a special Medicaid gift trust where they are preserved. Those who worry about making it five years after they transfer assets often use investments (annuities or life insurance) in the trust with long-term care riders that will help privately pay for care, should they need it before the five-year look-back period has expired.