Gift Tax Exemptions v. the Medicaid Lookback

You may have heard that you can give your children up to $14,000 each year without penalty. You may also have heard that there is a five-year lookback period when you apply for Medicaid. Though these are both planning issues that might be relevant to you, they are not connected. They’re two separate rules that apply to two separate situations.

Gift Tax Planning

The federal government imposes a tax on gifts that individuals give to others. There is a large exemption: an individual can give $5.46 million (increasing to $5.49 million in 2017) in gifts during their lifetime before they have to pay the tax. 

There is also a yearly exemption- you can give $14,000 every year to as many people as you want without having to inform the IRS of your gift. (So I can give $14,000 to my brother, my sister, and three of my friends, and that's $70,000 I can give away without paying gift tax.) It’s only after the gifts you give total $5.46 million over your lifetime, not including the first $14,000 you give to any person during any year, that you pay the gift tax.

As you can see, not many people end up paying the federal gift tax. Not only are the exemptions large, but certain gifts, such as education and health expenses paid directly to the provider, do not count. You can pay your grandchild’s $50,000 private school tuition, for example, without making any taxable gift. Gifting strategies are generally used to reduce an individual’s estate and gift tax liabilities.

This $14,000 annual exemption is only for gift taxes. It does not have any relevance to Medicaid planning.

Medicaid Planning

If you apply for Medicaid in order to pay for your long-term care (such as a stay in a nursing home), the state Medicaid agency will ask to see five years’ worth of financial records. These records are used as part of your application to determine whether you can afford to pay for your own care. (Medicaid is a welfare program, and there are strict asset and income limits for applicants.) The state Medicaid agencies are looking for evidence that you have moved assets out of your estate in order to make yourself eligible for Medicaid- for example, if you’ve given your child a check for $100,000 soon after receiving a diagnosis that indicates you'll need nursing home care.

If the Medicaid agency determines that you have made gifts out of your estate in order to make yourself eligible for Medicaid, you may have to "cure" that gift- that is, get the recipient to give the asset back. 

This prohibition on moving money out of your estate does not have anything to do with the $14,000 gift tax exclusion amount. You cannot give $14,000 away each year without penalty from Medicaid- with Medicaid applications, each transfer is examined individually. If you’re interested in planning for your long-term care, it’s a good idea to meet with a lawyer to discuss your options and make sure that you aren’t doing anything that will harm you during the Medicaid application process.

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