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By John M. Bigler Among the many confusing aspects of elder law planning, one of the greatest is the relationship between Medicaid planning and gift and estate tax planning. Often times in planning for one, seniors will ignore the other and that can have a disastrous effect on finances. As well, all too often there is a confusion between the application of Medicaid transfer rules and gift tax rules. The first thing to understand is that both need to be considered when doing planning for a senior is that they are entirely unrelated. Medicaid has its set of rules and regulations and the IRS has its set of rules and regulations governing gift taxes.
Another misconception that many people have is that by making gifts of $10,000.00 or $11,000.00 per person each year, they can not only avoid gift taxes, but can avoid a Medicaid period of ineligibility as well. I can remember several clients who have called me angrily after a consultation demanding to know why I did not tell them that they could simply make gifts of $10,000.00 per relative and avoid any penalties for nursing home Medicaid eligibility. The fact is that the Department of Social Services could care less how uncompensated transfers or gifts are divvied up. Their only concern is the cumulative value of the transfers. It does not matter whether one makes ten gifts to ten family members of $10,000.00 or one gift to one individual of $100,000.00. The period of ineligibility for nursing home care remains the same. On Long Island a gift of $100,000.00 divided by what the state says is the average monthly cost of a nursing home on Long Island ($8,583.00 for 2003) still comes out to a period of ineligibility of 11_ months starting the month after the transfer was made.
Another problem that I run into frequently is people who have done Medicaid planning on their own or with the assistance of an attorney who is only somewhat familiar with the law. They may make wholesale transfers without giving any consideration to gift and estate tax planning. Especially in spousal situations where there may have been some very sophisticated estate planning already undertaken by a tax attorney, to mindlessly transfer assets from one spouse to another worrying about the possibility of nursing home may end up costing significantly more in estate taxes by undoing the plan that was in place.
Medicaid planning and gift tax considerations both need to be considered as part of a comprehensive elder law plan. Remember not everyone will need a nursing home in their lifetime, but most of us will probably die and certainly all of us will pay taxes.
Reprinted with permission of the Suffolk Times © 2003
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When they are advised to make transfers for Medicaid purposes, many people are concerned about the gift tax implications. They believe that they must find a number of different family and friends to transfer assets to so as not to incur a gift tax. Most people have the belief that they must make gifts in $10,000.00 increments so as to avoid gift taxes. In actuality, an individual is allowed to make gifts of $11,000.00 per person per year and not necessarily to family members in order to avoid gift tax. This $11,000.00 provision is in addition to a $1,000,000.00 lifetime exemption from gift and/or estate taxes. Estate taxes simply being the tax paid on gifts made after death. That means that an individual can actual make a gift of $1,011,000.00 to one individual at one time without being responsible for paying any gift tax. This is critical to clients when doing Medicaid planning. When I advise family members of an individual in need of Medicaid that we will want to transfer several hundred thousand dollars, many people immediately start thinking of who can be trusted in the family and who can not. I then reassure them that the money can be transferred to one or two closest and most trusted members of the applicant's family who will be expected to hold it and use it on behalf to the applicant. The last thing we want when transferring assets is to be worried because the assets are split amongst many individuals. As a general rule, the more people holding the money the better chance for misuse. I always warn about the nephew driving by the family home in the brand new red convertible and immediately triggering concerns about whether he is still holding the money that he is supposed to.