Giving or Receiving Gifts and the Impact on Medicaid Eligibility: Understanding the IRS’ Gift Tax Exclusion

Last updated: December 14, 2021

 

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. This allows donors to gift up to a certain amount tax-free. In 2022, this gift exclusion is $16,000 per donee (recipient). This is the first time in several years it has increased, as it remained at $15,000 from 2018-2021.

There is no limit to how many persons a donor is allowed to give. As an example, an elderly woman with 3 adult children and 7 grandchildren can gift $16,000 to each one, gifting a total of $160,000 for the year without paying any taxes on the combined gifts. If she is married, her spouse can gift each of the children and grandchildren an additional $16,000. This means a married couple has a combined annual gift exclusion of $32,000 per recipient. Furthermore, the woman and her spouse can continue gifting each of them the maximum gift exclusion year after year.

In 2022, as long as the gift is not greater than $16,000 per recipient ($32,000 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. As individual has a $12.06 million lifetime exclusion (per donor) on reported gifts, and as long as one does not exceed this lifetime exclusion, no taxes need be paid. A married couple has a lifetime exclusion of $24.12 million.

 CAUTION: It is common for persons to think that the IRS gift exemption extends to Medicaid rules. This is incorrect! The tax-free annual gift exclusion is solely an IRS rule and applies only to taxes. Unfortunately, this misbelief can unknowingly cause one to be ineligible for long-term care Medicaid because it is considered a gift and violates Medicaid’s look back rule

 

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 2022, 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 nearly all states. California is one exception and has a look back period of only 30-months. New York is also an exception and currently has no look back period for Community Medicaid, through which long-term home and community based services is available. However, the state will begin implementing a 30-month look back period in 2022.

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 cost of private pay nursing home care 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, $16,000, 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 $16,000 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 $16,000 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 child exemption and a sibling exemption, which allows a Medicaid applicant to transfer their home to their adult child or sibling under certain circumstances.

 

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. 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, they 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 their 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”, they 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 they 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. In the month of receipt, the inheritance will count as income. This could potentially cause Fred to be ineligible for Medicaid for the month. (In 2022, the income limit is generally $2,523 / 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 a gift is received prior to Medicaid application, pushing one over the asset limit, excess assets can be “spent down” 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.

 

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