I have met with hundreds of people regarding Medicaid planning issues.  The stories, while always different, are also very similar in many ways.

Mom was living at home, fell, went to the hospital, is receiving rehabilitation now , and won’t be able to return home.  Assume that mom, we’ll call her Mrs. Smith for simplicity sake, has $200,000 in cash.  Mrs. Smith’s daughter comes to see me and she wants to preserve mom’s $200,000 and qualify her mother for Medicaid benefits.

Medicaid is a health insurance program for needy individuals.  It is a federal and state program.  Unlike most health insurance programs, Medicaid will pay for the costs associated with long-term care, such as care in a nursing home or assisted living residence.  Since care in a nursing home can cost upwards of $11,000 a month, many people would like to qualify for Medicaid when they require care.

In order to qualify for Medicaid benefits, an individual must have less than $2,000 in assets, so Mrs. Smith, who owns $200,000 in assets, has $198,000 too much.  What can Mrs. Smith do to preserve some of her assets?

Many of the people who come to me hoping I can help them save some of mom’s money will say to me something such as, “What if we give $13,000 to each of mom’s grandchildren to get rid of the money?”  It’s as if by simply getting rid of the money, mom will qualify for Medicaid benefits.

This type of “plan” is pure foolishness.  It is, in my opinion, the opposite approach one should take in trying to preserve Mrs. Smith’s money.

First of all, by giving Ms. Smith’s money to multiple people, such as her grandchildren, you are creating a high likelihood that Mrs. Smith will not get her money back if she needs it.  Medicaid planning is never an exact science and sometimes money needs to returned.   Furthermore, if the grandchildren are minors (under the age of eighteen), then legally they could not return the money.

Secondly, gifting $13,000 has nothing to do with Medicaid planning.  People are always telling me that they can only gift $13,000 a year.  The $13,000 a year figure comes from the federal gift tax annual exclusion amount.  For federal gift tax purposes, a person can only gift $13,000 a year per person.  But this statement is only half the story.  A person can only gift $13,000 a year without reducing her $5,000,000 lifetime credit against gift tax.  So, unless a person is gifting more than $5,000,000, gifting $13,000 a year has no benefit.

Lastly, planning for Medicaid eligibility is quite complex.  it’s not just a matter of giving money away.  If a person is going to make gifts, she must do it pursuant to a concerted and well-developed plan.  In order to be eligible for Medicaid, a person must have limited assets (typically less than $2,000), insufficient income to pay for her care, and she must need hands-on assistance with three activities of daily living (clothing, bathing, toileting, walking).  Only when a person meets all of these criteria and files an application for Medicaid benefits will Medicaid even begin to punish the person for any gifts she may have made in the last five years.

So, simply giving away $13,000 does nothing, until Mrs. Smith applies for Medicaid, has no money and needs assistance with three activities of daily living.  When that happens, Medicaid will punish Mrs. Smith for having made those $13,000 gifts.  The punishment is a period of ineligibility for Medicaid benefits, and that period of ineligibility is calculated by taking the aggregate amount of money Mrs. Smith gave away in the last five years, let’s assume $70,000, and dividing it by the statewide average cost of a nursing home room, which the state says is $7,757.  Based upon a $70,000 gift, Mrs. Smith would be ineligible for Medicaid for nine months.

If the nursing home costs $11,000 a month, that means Mrs. Smith will owe the nursing home $99,000 for the $70,000 she made.  Who is going to pay that $99,000 bill?  So, as I think you can see, this is why you need a plan, not just a bit of misinformation and a strong desire to save money.