Attorney Burton answers the following question: "How many years have to pass to make gifts to kids safe from Medicaid?" Attorney Burton discusses the state and federal laws involved with making a gift and the five year lookback period for gifts made prior to applying for Medicaid long term care assistance in this video.
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Hello, I'm Attorney Thomas Burton.
I'm an estate planning and asset protection attorney here in Wisconsin and today's question comes from Chippewa Falls, Wisconsin and the viewer asked the following:
"If I gift my children $15,000 in a year and I should have to go to a nursing home, how many years has to pass before it is theirs? I was just wondering if gifting the children some of my savings, if it still can be taken from them, if I go into a nursing home? I think there is a time limit, five years?"
Okay, this is a very good question, one you should consider carefully when you're approaching asset protection and Medicaid planning which is what I call the type of planning you're considering here.
Now, let me answer the first part first, $15,000 is the limit on what an individual can give to any other individual in a single, taxable year without filing a federal gift tax return and that is the limit for this year 2020. $15,000 is the max, so basically you can write a check to any person, just give them money and you don't have to file a federal gift tax return for $15,000 or less, in one taxable year.
So that is federal tax law but it's unrelated to the Medicaid program and this $15,000 is what we call the annual exclusion amount meaning the IRS doesn't look at the first $15,000 in gifts to one person per year. If you go over that in a year, you can do this but you need to file a gift tax return which reduces your lifetime exemption amount which is currently around 11.2 million by that amount but there is a requirement to file a federal gift tax return and many people don't want to deal with this so they abide by that $15,000 or lower limit.
Now many people do gift more and there's good reasons for tax planning to do that but I'm just making you aware of what that $15,000 limit where it comes from the federal tax law. However, when it comes to Medicaid, Medicaid is a separate program, it's funded by the federal government and administered by the states and it's designed for people with limited assets meaning if you have too much assets, too much money, you do not qualify in general until you get below $2,000 in liquid assets in your account. You can have a house, a car, personal property and a prepaid burial plan and a few other things but Medicaid looks at any gifts made in the last five years before you need Medicaid assistance and that's what we call the five-year look-back period. So any gifts made in that period, if you make a gift, let's say in year today, in four years from now you need Medicaid and you gifted away $15,000, Medicaid will review all your bank statements, find that gift and they will penalize you and say you cannot receive Medicaid for a period of months based on this $15,000 gift and the way they calculate the penalty is based on the current cost of care in the state of Wisconsin and right now, statewide average it's around $8,000 a month, private pay, nursing home care, $8 - 9,000, depending where you are in the state. Can be more, it can be up to 10 but that $15,000 gift just roughly, for I would think in that classic care goes up every year, so it would likely penalize you for at least two months or more from receiving care meaning Medicaid won't pay for your care during that period, you have to pay for it and so the problem is if you gift away your assets, you a lot of assets, you will incur this large penalty period which can be many multiple months or years and they actually penalize you, they don't penalize your children, so the children won't have to give the money back you see, they're going to just say to you that you're penalized for making the gift and in my experience, you could hope your children would pay the penalty but a lot of times, they don't have the money anymore by the time that point in time comes.
So I don't recommend this method of gifting away assets and incurring that large divestment especially if you think you may need Medicaid in the next five years. Now you know your own health situation, of course no one knows for sure but you have to look at your age, your current health condition and perhaps the ages of your parents and try to figure that out.
So again, that penalty period is a waiting period and it starts whenever you would submit the Medicaid application. So if you make the first gift of $15,000 today, you have to get past five years from today's date to be outside that look back window. So if you are contemplating some Medicaid asset protection, there are ways to go about this such as using an irrevocable Medicaid asset protection trust but I would only recommend you do this type of planning working closely with a qualified estate planning and elder law attorney, who can advise you on all the potential pitfalls and give you the best path forward because if you're talking about significant amounts of money here like let's say $15,000 and the cost of care nursing home which is $8 - 9,000 a month, it's worth it to pay an attorney for planning, let's say you go through the process with them for one month or six weeks, it's worth it to pay that cost to get it set up right, so your entire plan doesn't fail later and if you have enough assets where it makes sense that you're looking at doing some of this then in my opinion, it's crazy to not do it with the help of an attorney because likely it will lead to problems for you later.
So I hope this is helpful to kind of lay out for you how that works with the look back period. I've got other videos specifically on the Medicaid look back period, check that out and if you're interested in learning more about how a trust, an irrevocable trust could help with this, I've got a five-step guide 'How to protect your home from the nursing home', it also works for other assets such as cash or bank accounts. So check out the link to that video, I'll put it the link in this video description below.
So again, great to have a question from right here in the local area in Chippewa Falls, great question, thank you for asking and we'll see you next time!
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