What is the Gift Tax / Gift Tax Exemption?
Gift tax is a federal tax that is applied when a person (a donor) gives something of value, such as cash or real estate, to someone else (a donee) without payment or receives payment under market value. It is the donor who is responsible for paying the gift tax. Stated differently, the recipient does not pay a gift tax.
The Internal Revenue Services (IRS) sets an annual gift tax exemption, which allows donors to gift up to a certain amount tax-free each year. As of 2021, this gift exclusion is $15,000 per donee (recipient). There is no limit to how many persons a donor is allowed to give. As an example, say an elderly woman has 3 adult children and 7 grandchildren. With the gift tax exclusion, she can gift $15,000 to each of them, equaling $150,000 in gifts for the year, and not pay taxes on any of the combined gifts. If she would like, she can continue gifting each of them up to $15,000 per year, year after year. If she is married, her spouse is able to gift each of the children and grandchildren an additional $15,000 per year. This means a married couple has a combined annual gift exclusion of $30,000 per recipient.
As long as the gift is not greater than $15,000 per recipient ($30,000 in the case of a married couple), it does not have to be reported to the IRS by the donor(s). If the gift is greater than the allowable amount, the IRS needs to be notified and a gift tax return must be filed. However, in most cases, the donor will still not have to pay taxes on the gifts. This is because, as of 2021, there is a $11.7 million lifetime exclusion (per donor) on reported gifts, and as long as one does not exceed this lifetime exclusion, no taxes need be paid. To be clear, a married couple has a lifetime exclusion of $23.4 million.
How Does Gifting Impact Medicaid Eligibility?
For Medicaid eligibility purposes, each state has a look back period, in which all past transfers are reviewed to ensure assets were not given away to meet Medicaid’s asset limit. The asset limit varies by state, and as of 2021, ranges from $1,600 to $15,750 for a single applicant. See asset limits by state, as well as what assets are not counted.
The look back period immediately precedes one’s application date and is 60-months in all states, but California, which has a shorter look back period of 30-months. (New York is in the process of implementing a 30-month look back period for long-term home and community based services). If a Medicaid applicant has gifted assets or sold them under fair market value during the “look back”, there will be a penalty period of Medicaid ineligibility. The length of disqualification is determined by the amount of the gift and the average monthly cost of private pay nursing home Medicaid in the state in which one lives.
Unfortunately, many people wrongly think that the IRS gift exemption extends to Medicaid eligibility. To be very clear, gifting the maximum annual gift tax exclusion, $15,000, or any amount for that matter, is a violation of Medicaid’s look back rule. Remember, the gift tax exclusion is a rule set forth by the IRS, not Medicaid. As an example, say a Medicaid applicant gifted his granddaughter $15,000 for college two years prior to applying for Medicaid. While this gift will be not taxed by the IRS, it violates Medicaid’s look back period, and a period of Medicaid ineligibility will be established. That said, if the same person gifted his granddaughter $15,000 prior to the 60-month look back period, there is no violation of the look back period. Therefore, there is no period of Medicaid disqualification.
There are exceptions to the look-back rule and not all transfers (gifts) result in a period of Medicaid ineligibility. For instance, there is a caregiver exemption and a sibling exemption, which allows a Medicaid applicant to transfer his / her home to his / her adult child or sibling under certain circumstances. Learn more here.
What Can be Done about Past Gifts Made?
If one has unknowingly violated Medicaid’s look back period, this is not automatic cause for panic. Some states will recalculate the penalty period, given Medicaid applicants are able to get the gifts (generally cash) back. Some states allow partial return, while other states require full collection. Please note that the return of assets generally results in the Medicaid applicant having “excess” assets, or put differently, assets over Medicaid’s limit. As long as the applicant is over the asset limit, he / she will not qualify for Medicaid. However, the applicant is able to “spend down” excess assets without violating Medicaid’s look back rule. For instance, an elderly applicant might pay for his / her long-term care until the excess assets have been depleted, pay off debt, make home modifications for safety and accessibility, or purchase an irrevocable funeral trust. Once the excess assets have been “spent down”, he / she would qualify for Medicaid.
There is another option for persons who are unable to get reimbursement of assets gifted. Although infrequently permitted, there is an undue hardship waiver that one can pursue. In simple terms, this waiver is granted when an applicant can prove that he / she will endure “undue hardship” if the penalty period is not lifted. In more explicit terms, this means that an applicant would lack appropriate medical care, shelter, food, clothes, and other things essential to living if denied long-term care Medicaid eligibility.
Does Receiving a Gift Affect Medicaid Eligibility?
Yes, receiving a gift can affect Medicaid eligibility. Remember, Medicaid has an asset limit for eligibility purposes, and even a small gift can push a Medicaid applicant / recipient over the limit. As an example, Fred is a Medicaid recipient living in a nursing home. He lives in a state that allows a maximum of $2,000 in assets. He has $1,500 in assets, and receives a small inheritance of $2,000 upon his sister’s death. The month of receipt, the inheritance will count as income. This could potentially cause Fred to be ineligible for Medicaid for the month. (In the majority of states, as of 2021, the income limit is $2,382 / month. See income limits by state.) The following month, any unspent inheritance will count as assets. This could jeopardize Fred’s Medicaid eligibility, as he must keep his assets under the asset limit. Fred must spend the inheritance that pushes him over the asset limit, in its entirety, the same month he receives it to avoid Medicaid disqualification. To avoid violating the look back rule, which can be done even after one has been found eligible for Medicaid, Fred might use the excess assets towards his nursing home care, pay off debt, or purchase an irrevocable funeral trust or a Medicaid-compliant annuity If Fred does not “spend down” the excess assets, he likely will be disqualified from Medicaid and have to reapply when his assets are once again below the state’s asset limit.
If one receives a gift prior to Medicaid application, pushing him / her over the asset limit, one can “spend down’ excess assets without violating Medicaid’s look back period. Again, this may be done in several ways, as mentioned above.
Getting Professional Assistance
Given the complexity of Medicaid eligibility, particularly if one has assets over the limit or has violated Medicaid’s look back period, it is strongly advised one consider Medicaid planning. Professional Medicaid planners are knowledgeable about the Medicaid rules in each state, are familiar with planning strategies to preserve assets for family as inheritance, and make the application process much less complicated for an applicant. Find a professional planner here.