As we have discussed in prior columns (6/13/10 and 6/20/10), you have to spend down your excess assets before Medicaid will pay for your nursing home expenses. In order to spend down excess assets and qualify for Medicaid, I often hear “I can just give away $13,000 a year per person without penalty.”
If this is you, what you may not know is that this rule is a Federal gift tax limitation that has nothing to do with Medicaid eligibility. For Federal gift tax purposes, you can give away up to $13,000 per person per year without having to report it to the IRS. Medicaid gifting rules, however, are completely different.
For Medicaid purposes, any transfer of income or assets for less than fair market value within five years of your Medicaid application is considered a divestment. Upon Medicaid approval, a divestment will result in a penalty period during which time Medicaid will not pay for nursing home care.
The penalty period is calculated by taking the total amount of the divestment and dividing it by the average monthly nursing home cost in Michigan which for 2010 is $6,618. The penalty period only runs if you apply for Medicaid and are approved. With no application or no approval, then there is no commencement of the penalty period.
All gifts, no matter what amount, are divestments if they were made within five years of your Medicaid application. When you apply for Medicaid to pay for nursing home care within five years of the gift, that gift will create a Medicaid divestment penalty period. Even if you have no money because you gave it all away, Medicaid still will not pay your nursing home expenses during the penalty period.
For example, let’s say you gave away your last $65,000, $13,000 to each of your five children. You would not have to report those gifts for Federal gift tax purposes. Now say that within five years of these gifts, you went into the nursing home. You then applied for Medicaid to pay for your nursing home care because you had no funds.
Even if you made no other gifts within five years of your Medicaid application, Medicaid would not cover all of your nursing home expenses. There would be a period of time that the gifts totaling $65,000 will disqualify you from having Medicaid pay for nursing home care.
With gifts of $65,000, when you apply for Medicaid and are approved, there will be a penalty period of 9.8 months ($65,000 ÷ $6,618). For 9 months and 24 days, your family would have to private pay your nursing home care.
Generally, outright gifts are divestments. But what about other transfers to your family for less than fair market value? For example, if you sold your $100,000 cottage to your daughter for $65,000, you would have a part gift and part sale. Unfortunately, this gift would result in a divestment of $35,000 for a penalty period of 5.3 months.
How about paying your grandson $1,000 to mow your lawn? You are getting something in return for your $1,000. Unfortunately payments for more than fair market value would also result in a divestment penalty period. If mowing your lawn is normally a $25 job, this payment would be a $975 divestment for a penalty period of five days.
So if you have excess assets, what do you do? There are a variety of ways to spend down your assets without incurring divestment penalties. We discussed a number of them in my 6/13/10 column. But there are others including transfers to a solely for benefit of spouse trust, transfers to disabled children, purchasing of Medicaid qualifying annuities and loaning money in exchange for a Medicaid qualifying promissory note.
I have often seen people try to do spend down on their own without knowledgeable guidance which then has resulted in months of Medicaid ineligibility and substantial nursing home care bills for the family. Before attempting any of these techniques, you should consult with a knowledgeable legal specialist.
By: Matthew M. Wallace, CPA, JD
Published edited June 27, 2010 in The Times Herald newspaper, Port Huron, Michigan as: Gifts may do more harm than good