Beware of Your Own Generosity

Few issues prompt more questions to me than the concept of gifting.  In my experience, when it comes to gifts, people tend to focus on the unimportant and ignore, or are ignorant of, the important issues associated with gifting.

A gift occurs anytime a person gives something away and does not receive something of equal value in exchange for the thing given.  Clearly, if Mrs. Smith gives her son $10,000 and her son gives her nothing in return, a gift has occurred; however, gifts occur all the time without people knowing that a gift has occurred.

For instance, if Mrs. Smith gives her son her car, Mrs. Smith has gifted her car to her son.  Whatever the value of the car was at the time of the gift is the value of the gift.  Similarly, if Mrs. Smith “sells” her car to her son for $500 and the car is worth $5,000, then a partial gift has occurred.  If the son removes Mrs. Smith’s name from a bank account that held Mrs. Smith’s money and adds his name to the new account, then a gift of the bank account has occurred.  If Mrs. Smith adds her son’s name to the deed for her house, then a partial gift of Mrs. Smith’s house to her son has occurred.

Most people think they can only gift $15,000 a year without paying gift tax.  The fact of the matter is, a person can gift $11,200,000 during her lifetime without paying gift tax.  If a person gifts more than $15,000 in any given year to one person, then a gift tax return must be filed and the amount of the gift above $15,000 reduces the lifetime credit dollar-for-dollar.

Assume that Mrs. Smith gifts $20,000 to her son. Mrs. Smith must file a gift tax return, an IRS form 709.  No gift tax will be owed, but Mrs. Smith lifetime credit against gift tax will be reduced from $11,200,000 to $11,195,000.  Since most people have nowhere near $11,200,000, most people should have no concern about ever paying gift tax, and since a gift tax return is a simple tax form that most anyone can complete, there is little hassle associated with making a large gift.

What is a concern for gifting is the potential impact of the gift on the person’s eligibility for Medicaid benefits. If Mrs. Smith gives her son $20,000 or a partial interest in her house or her car, then those gifts could come back to haunt Mrs. Smith’s eligibility for Medicaid benefits if Mrs. Smith requires long-term care and applies for Medicaid benefits within five years of making the gift.

This is what the Medicaid five-year lookback is all about. When a person gifts any asset within five years of filing an application for Medicaid benefits, those gifts can come back to haunt the person’s application for Medicaid.

Pursuant to the five-year lookback, all gifts made within five years of applying for Medicaid benefits are aggregated. The aggregate value is then divided by a number, which is based upon the statewide average cost of a nursing home room.  That number is currently around $10,500.  So, for every $10,500 of aggregate gifts that Mrs. Smith made during the lookback period, she will be ineligible for Medicaid benefits for one month.

Since Mrs. Smith has no money—she is, after all, applying for Medicaid—she is subject to being discharged from the nursing home in which she resides if Medicaid assesses a penalty period against her for making gifts during the lookback period. If her son doesn’t want her discharged from the nursing home, her son may have to pay for the cost of her care.  Since a nursing home can cost upwards of $14,000 a month, the cost of Mrs. Smith’s care might exceed the value of the gifts that Mrs. Smith made to her son.


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