You have probably heard from family or friends that you can give up to $10,000 per year without having to report it. As with the case of most legal and tax advice you hear from family and friends, it is only half right.
Pursuant to the Federal gift tax laws, you can gift up to $13,000 (up from $10,000) per person, per year without having to report it for Federal gift tax purposes. With gift splitting, a husband and wife can gift up to $26,000 per year per person without the necessity of reporting it for Federal gift tax purposes.
However, for other purposes, these gifts are reportable and countable. For example, you need to report any gifts you made over the last five years when you are in a nursing home and applying for Medicaid to pay for nursing home costs. Every single one of those gifts, no matter how small, will be counted.
For Medicaid purposes, there is no minimum gift which is non-reportable. Any gift you made within the last five years are considered divestments and are reportable.
These gifts will create a divestment penalty period during which Medicaid will not cover your nursing home care. That penalty period is calculated using the total gift divided by the Michigan Department of Human Services (DHS) divestment penalty divisor.
The divestment penalty divisor is determined annually using the average nursing home costs in Michigan. At the time that I am writing this column in February of 2010, the DHS Eligibility Manual has not been updated with the 2010 amount. The 2009 amount was $6,362.00.
For example, if you made a gift to your family of $25,000 in 2007 and applied for your Medicaid for nursing home care in 2009, then that gift would create a divestment penalty period of 3.9 months. During the penalty period, Medicaid would not cover nursing home costs. Your family would have to cover those costs with their own money or use the gift money to pay for your care.
So couldn’t you just give everything away today if you don’t think you will need nursing home care in the next five years? Yes, so long as you do not apply for Medicaid within five years of the gifts. Those gifts would be transferred to your children without penalty if you went to the nursing home more than five years after the gifts.
You do not have to report any gifts made more than five years from the time that you applied for Medicaid. That is the good news. The bad news is that you no longer have those assets for yourself or for your care. Your assets are now your children’s or others’ and are no longer available for your own needs. They are gone.
If you can guarantee that you will not need nursing home care in the next five years and that you will not ever have a need for your assets for the rest of your life, then go ahead and give everything away. If you are like most people, you will need your assets for yourself and/or your spouse. Most people do not want to give assets away unless it is absolutely necessary to protect those assets from nursing home spend down.
So what can you do? It used to be that you could make monthly gifts up to a certain amount that would not be counted as an available resource or considered a divestment. You could also buy “Medicaid qualifying” annuities that would be protected. These types of pre-planning are no longer appropriate.
If you are married and your spouse enters into the nursing home, there are certain assets that the nursing home spouse can gift to the non-nursing home spouse. The nursing home spouse then can transfer any assets in excess of the spend down limits into a special spousal trust that is allowed by both Federal and State statutes. Those assets in the spousal trust would still be available to the non-nursing home spouse for the rest of their life, but would not be considered countable for the Medicaid asset tests.
If you are single and enter a nursing home, you can similarly protect assets for your family. You can gift approximately one-half of your countable assets to your family which would create a divestment penalty period. You then use the other half of your countable assets to purchase a special “pension.”
You can convert countable assets into an income stream by purchasing this pension. This pension must be in the form of a certain Medicaid qualifying annuity or promissory note.
The entire gift of one-half your assets would be protected for your family. The pension would be counted as your income to pay for your nursing home care during the divestment penalty period.
However, if you are in the nursing home, you may be incapacitated and be unable to do this planning and make these gifts. How do you make sure that those gifts can be made?
The best way is to prepare and sign a durable financial power of attorney with the broad power to gift. That power to gift should allow your power of attorney agent to make gifts to anyone including themselves for any purpose.
I often see financial powers of attorney that either have no power to gift or have a power to gift that is either limited to the annual Federal gift tax exclusion or to a pre-existing gifting plan. With financial powers of attorney that have either no gifting powers or limited gifting powers, your agent cannot protect your assets for your family. Your assets would have to be spent down for your nursing home care.
If you would rather have your family receive your assets instead of the nursing home, include these broad powers to gift in your financial power of attorney.
When preparing your financial power of attorney, be careful. We all have heard stories about children or grandchildren with powers of attorney stealing assets. Make sure that the person to whom you give these powers can be trusted. You do not want your agent taking your money to your detriment.
It is also very important to discuss these matters with your family. That way, everybody understands what your wishes are and what they need to do.
By: Matthew M. Wallace, CPA JD
Published edited February 7, 2010 in The Times Herald newspaper, Port Huron, Michigan as: Protect yourself and your assets