Many seniors worry that if they ever need nursing home care, they will lose everything they own. With nursing home costs averaging well over $90,000 a year in Pennsylvania, the prospect of losing everything is very real. As a result, many seniors think about gifting their cash or property away to their children before everything is gone.
Making gifts to your children can make sense, but it has many complicated tax and Medicaid implications. Over the years I have found that one common area of misunderstanding is that my clients often confuse Medicaid rules with the IRS rules regarding gifting.
Medicaid rules are important because the Medicaid program is the largest source of payment of nursing home costs. Approximately two-thirds of Pennsylvania nursing home residents have most of their care costs paid for by Medicaid.
If you need nursing home care but can’t pay for it, Medicaid will usually step in and pay for that care. But, if you have given money or property away you may be ineligible for Medicaid assistance. In Pennsylvania, that means the nursing home can sue your children to force them to help pay for your care. (See: PA Ruling: Son must pay mother’s nursing home bill). So, if you are going to give things away, you need to understand the impact of those gifts on your ability to qualify for Medicaid.
Many people have heard that you can give away a certain amount each year tax free. They may have heard that the exempt amount is $10,000 or $13,000. (It is $13,000 this year). But this is a tax rule, not a Medicaid rule. And it is the Medicaid rules not tax rules that determine what nursing home residents (or their family members) will have to pay towards the cost of care.
Pennsylvania Medicaid does not permit you to give away more than $500 in any month without the gift potentially affecting your eligibility for Medicaid benefits. On the other hand, the Medicaid rules contain a multitude of exemptions and planning opportunities.
For example, there are situations where you can give your home to your child without any negative effect on your eligibility for Medicaid. Other rules may allow you to give investments away without penalty or pay your children for caregiving services. This means that a well-informed senior will usually be able to transfer away far more than would be permitted under IRS tax rules. Because the rules are so complicated, this type of planning should only be done with the guidance of an experienced elder law attorney.
Another concept that confuses people is the Medicaid “look-back” rule for gifts. Many people think that gifts have to be made 5 years before seeking eligibility for Medicaid. But this is usually incorrect.
Gifts made more than 5 years before applying for Medicaid are ignored. So are exempt gifts. Non-exempt gifts made within 5 years of applying for Medicaid long term care benefits are penalized. The penalty period depends on the value of the gift. It may be anywhere from a few days to months or even years depending on the value of the gift. The rules are complicated and it is critical for families to get the best possible advice from an experienced lawyer who is working for you (and not from someone working for a nursing home). Mistakes can be very costly.
Although procrastination is your enemy and early planning is almost always best, most people can be assisted with preserving a significant amount of assets even if a family member is already in the nursing home. For example, here is a common situation the lawyers at my law office see frequently:
A new client comes in. Her husband has been in the nursing home for two years. When he entered the facility they had $300,000 in investments. Now, two years later, and with only $160,000 left, the wife wants to know if anything can be done to get her husband on Medicaid. After reviewing her situation, there is good news as well as bad news to deliver. The good – we can make her husband eligible for Medicaid immediately, subject only to the time it takes to purchase a DRA compliant annuity and go through the application process, and the remaining $160,000 will all be preserved for her. The bad news - the entire $300,000 could have been preserved under Medicaid laws and her husband could have received Medicaid two years ago if she had just sought out our help at that time.
If you are worried about nursing home costs, or thinking about making gifts to your children, the best time to start the conversation is today. Be sure to include an elder law and Medicaid expert in that conversation. If you live in Pennsylvania, you can learn about the Medicaid rules and your options from my law firm: Marshall, Parker and Associates. Your initial consultation is free. If you reside in another state, you can find a national list of certified elder law attorneys at www.nelf.org.