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 $18,000 per year (as of 2024) per person, but in this case, the short answer is not the best answer. [1]

The best way to address asset protection, related to Medicaid, is to work with an attorney to create a Medicaid Asset Protection Trust, (also known as a Medicaid Trust), at least five years before depleting assets and going into a nursing home).

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 lookback 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 how a gift tax-free transfer can create a penalty period:

On January 1, 2023, you give your daughter a gift of $9,000. No gift tax return is required because the gift is less than $17,000.

Three years later, you go into a long-term care facility, spend down all of your assets on medical care, and must file a Medicaid application. When your application is filed, you will be penalized for that gift you made in 2023.

The penalty period is determined by dividing the gift amount 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 (potential monthly cost of nursing home care), which is 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 need the medical care.

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 first to 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.

What is a Medicaid Asset Protection Trust?

A Medicaid Asset Protection Trust (MAPT or a Medicaid Trust) is an irrevocable trust designed to help individuals preserve their assets while qualifying for Medicaid benefits.

In Ohio, a MAPT is a legal instrument that is used to protect assets from the Medicaid spend-down requirements, which means that it allows individuals to transfer assets into a trust to be managed and distributed by a trustee for the benefit of the trust’s beneficiaries, while still potentially qualifying for Medicaid coverage of long-term care expenses.

The MAPT must be created and funded at least five years before the individual applies for Medicaid benefits to be effective. It is important to note that creating a MAPT involves complex legal and financial considerations and should be done with the guidance of an experienced estate planning attorney knowledgeable about Ohio’s Medicaid laws.

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

If you already have an Estate Plan but are unsure if an update is needed, here is an Estate Plan Review Checklist. This checklist includes important items to consider when reviewing an existing plan.

[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

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