Medicaid: The Perils of Gifting FAQ

Updated on 6/28/18

Can’t I just give all of my assets away?

The answer is “maybe” — but only if you do it the right way and at the right time. If assets are given away at the wrong time and/or in the wrong amount, the law provides for a penalty —  a period of ineligibility for Medicaid — based on the amount of the transfer.

Doesn’t federal law allow me to give away $15,000 a year away to my children?

Yes, in 2018, the Federal Gift Tax laws allow you to give away up to $15,000 per year to anyone you want without the requirement of filing a gift tax return.  You and your spouse may each give an unlimited number of these $15,000 gifts per year.  So, for example, if you have 4 children and 8 grandchildren, you could give away up to $180,000 each year without the requirement of filing a gift tax return (note that cumulative gifts –during life and upon death — of less $11.2 million per person and double that for a married couple will never incur gift tax to the donor of the gift, and no amount of gift is ever taxable to the recipient of a gift). However, even though the Federal Gift Tax laws allow you to give away up to $15,000 per year to as many people as you wish without gift tax consequences, Medicaid laws still apply to these gifts, meaning that these gifts will result in a penalty — a period of ineligibility for Medicaid in most part of Virginia of one month for every gift of $5,933.  So, your $180,000 annual gift would actually result in more than 28 months of ineligibility for Medicaid.

Does giving money to my church or other charities create a penalty?

Yes. Giving away money to charity is treated the same as giving away money to your children or grandchildren. There is no exception for gifts made to charity. Many people who apply for Medicaid are horrified to discover that they are penalized for having been good citizens and having given money to charities.

Are the other downsides of gifting?

Yes. If a parent transfers assets directly to his children, certain risks must be anticipated: possible lawsuits or other creditor claims against a child; divorce of a child; poor spending habits of a child; the need for financial aid of a grandchild; and the loss of step-up in basis.

What are gift and  estate tax consequences of gifting?

In 2018, each individual can make cumulative gifts — during life and upon death — of up to $11.2 million per person (double that for a married couple) without incurring gift ore state tax to the giver of the gift.

No amount of gift is ever taxable to the recipient of a gift.

In addition to the $11.2 million per person lifetime gift and estate exlclusion, Federal Gift and Estate Tax laws allow you to give away up to $15,000 per year to anyone you want without the requirement of filing a gift tax return.  But, as stated, all gifts still can incur Medicaid transfer penalties if Medicaid is applied for within 5 years of gifting.

What are captial gains tax consequences of gifting?

One of the biggest drawbacks of lifetime gifting is loss of the step-up in basis upon the death of the owner of a home or other long-term investment.  Most investors, including owners of real estate, are subject to a 15% – 20% tax rate on their long-term capital gains. However, if an investor or property owner dies while still owning the property, the beneficiary of that property receives a “step up in basis,”  meaning that the tax basis in the hands of the beneficiary after death is the fair market value of the property upon the death of the prior owner. On the other hand, if an investor or property owner gives property away during his lifetime, then the recipient of that gift receives a carryover basis, meaning that the tax basiso of the the recipient of the gfit is the same as the tax basis of the giver of the gift.

For example, Mr. Smith wanted to protect his house by gifting it to his daughter and hoping he wouln’t need Medicaid for 5 years. Mr. Smith purchased his home in 1979 for $30,000 and never improved it, and it was worth $430,000 in 2015 when he gifted it to his daughter, Joan. Upon the gift, Joan’s tax basis became $30,000 –the same as her father’s tax basis.  If Joan sells in 2019, after her father’s death, for $430,000, Joan will owe capital gains tax on the $400,000 profit she received ($430,000 sales price minus her $30,000 of carryover basis).  At a tax rate of 20%, Joan would owe capital gains tax of $80,000.

If we change the facts slightly, Joan can avoid the $80,000 in capital gains tax. If Mr. Smith did not give the house to his daughter outright in 2017, but instead put the home into a Living Trust Plus™ Medicaid asset protection, which is designed so that assets are included in the estate of the Settlor, then Joan as the trust beneficiary would have received a step up in tax basis as to house, up to the fair market value of the house as of her father’s death. This means that when Joan sells the property after her father’s death for $430,000, she will pay zero capital gains tax becuase the value of the house was $430,000 when her father died, and her tax basis was therefore $430,000 because the trust preserved the full step up in basis. A very simple strategy here results in a significant tax savings.