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The Gift Tax Exclusion and Medicaid Eligibility: Does One Affect the Other?

Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.

Tax Day 2017 is around the corner!  As many know, the Internal Revenue Service (IRS) currently allows a person to make up to $14,000.00 in tax-free gifts per year to as many individuals as they choose, known as The Gift Tax Exclusion.  However, many seniors misunderstand or misinterpret this allowance.  Some believe one is able to make gifts up to the amount each year and it will not affect Medicaid eligibility.  Others believe they cannot gift more than this amount each year without being taxed on the value of the gift.  It is reasonable that many seniors would want to give gifts to their loved ones.  In many cases, making a calculated gift is part of the spend-down strategy for Medicaid eligibility.  Regardless of the reason for making a gift, it is important to understand how this action affects your clients.


Understanding The Gift Tax Exclusion

The annual tax-free gift exclusion is an IRS regulation only, and does not relate to Medicaid eligibility rules.

Gifting assets, in any amount, will create an eligibility problem should the individual enter a long-term care facility and need to qualify for Medicaid benefits.  Pursuant to the Deficit Reduction Act of 2005 (“DRA”), any individual applying for Medicaid is subject to a 60-month lookback period in which any gifted or transferred assets cause a penalty period of ineligibility for the applicant.  In other words, if a senior client is seeking Medicaid benefits, and he or she has gifted assets within the past 60 months, that client is ineligible for a specified period of time as determined by the total gifted amount.


Many confuse the annual tax-free gift exclusion with an exempt transaction for Medicaid purposes.  As stated above, the current limit for tax-free gifts is $14,000.00 per giftee. This means an individual may make gifts in the amount of $14,000.00 to different individuals without filing a federal gift tax form.  At the same time, every gift made by this individual becomes part of the 60-month lookback period for Medicaid purposes.  If your senior clients are making annual tax-free gifts, be sure to speak with them about the consequences these transfers could have should long-term care become necessary in the future.


Transferring Assets in Excess of The Gift Tax Exclusion

If an individual transfers assets in excess of the annual tax-free gift exclusion, it does not necessarily mean he or she will pay taxes on this amount.

In many cases, it may be recommended that an individual purposefully transfer assets for less than fair market value as part of a spend-down strategy for Medicaid eligibility.  In these cases, many clients have concerns about making gifts in excess of $14,000.00 to each giftee.  The individual does not want to be taxed on the gifts made – after all, the purpose of crisis Medicaid planning is to preserve as much wealth as possible.


It is true that an individual may have to pay taxes on gifts made in excess of the annual exclusion, however, only if the individual’s total gifts exceed $5.45 million (currently) over his or her lifetime.  This number is also the current estate tax limit.


The purpose of this regulation is to ensure those with large estates do not escape after-death estate tax consequences by gifting away their wealth while still alive.  Chances are, this lifetime threshold does not apply to the majority of clients seeking Medicaid benefits by utilizing the gifting / annuity strategy.  While the client still needs to file a gift tax form if the gift(s) made exceeds the annual limit, he or she generally will not actually be taxed on the funds unless the lifetime gifts exceed $5.45 million.


What does this mean for your senior clients?

Medicaid regulations are complex and hard for most seniors to understand.  Throw in some tax questions as well, and most will be unable to navigate these issues alone.  It is important for your clients to be aware of the effect gifting has on future Medicaid eligibility.  Furthermore, it is important for individuals to understand gifts in excess of $14,000.00 per person will not automatically result in taxation.


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