Annual Gift Tax Exclusion vs. Medicaid Look Back Period

By: Elliott Stapleton

Clients will frequently ask: How much can I give away before a gift tax return is necessary?

The short answer: Up to $14,000 per year (as of 2016) per person, but in this case, the short answer is not the best answer. [1]

Why is this important?

Just because you don’t have to file a gift tax return, does not mean you avoid all future penalties on the gift. The following explains how your gift could create a penalty for you (or your spouse) in the future.

60 month look back period for Medicaid

If you (or your spouse) go into a long-term care facility or nursing home and apply for Medicaid, there is a penalty imposed on recent gifts. Specifically, gifts made within the last 60 months, or five years, prior to applying for Medicaid. [2]

The IRS annual gift exclusion does not provide any exemption from the Medicaid look back period. If you (or your spouse) made a gift within the prior five years, the result will be a penalty period from Medicaid coverage.

Medicaid Penalty Period Example

Here is an example to illustrate the how a gift tax-free transfer can create a penalty period:

60 month look back period for Medicaid in Cincinnati Ohio

On January 1, 2017, you give your daughter a gift of $9,000. No gift tax return is required because the gift is less than $14,000.

Three years later, on January 1, 2020, you go into a long-term care facility and by December 31, 2020 you spend down all of your assets on medical care and must file a Medicaid application. When your application is filed, you would be penalized for that gift you made in 2017. The penalty period is determined by taking the amount of the gift divided by the average monthly cost of nursing home care (for this hypothetical, we will say that cost is $7,500 per month).

The calculation of the penalty period will be as follows: $9,000 (the amount of the gift) divided by  $7,500 (the monthly cost of nursing home care) which 1.2 months. Thus, you (or your spouse) would have to cover that 1.2 months of care from another source, or you may not have the medical care you need.

What should I do if I want to make a gift?

If you are considering a gift to your children, grandchildren, or any other third party, it is best to first consult your legal counsel. There are asset protection planning options and analyses that can limit the risk of an accidental Medicaid penalty period. It is also important to have an up-to-date power of attorney to ensure gifting can occur if you are incapacitated.

For more information, freel free to contact our firm for an initial consultation.

[1] Source: https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax

[2] Source: Ohio Administrative Code 5160:1-3-07.2 Medicaid: transfer of resources. http://codes.ohio.gov/oac/5160:1-3-07.2v1