Dear Clients and Friends,
We are shifting gears…our last question was simple and straightforward but today’s question is much more complex, so I’ll do my best to break it down.
My answer might spark more questions on this topic and if so, let me have them.
I thought I remember back at least 10-20 years ago, when I was first starting to do trust and estate income tax returns and was still a CFP, it was said by some speaker that if you can show a consistent pattern of always giving a specific type of gift every year that it would not be counted as a gift. Is that still true if, in fact, it really ever was?
I remember thinking at the time that this might apply to a life insurance policy on your life with your children as beneficiaries. Could Medicaid count those previous premiums against you and could they force you to stop making those payments and use the money for medical expenses that Medicaid would have otherwise paid?
I’m also thinking about the $6000 a year I put in my grown daughter’s Roth IRA every year to be sure that when I’m gone if my IRA funds are depleted for nursing home costs, that she will still have something adequate to retire on. Would these all be added up for the past five years to prevent me from getting Medicaid?
So, as I’ve already mentioned, this question is a little more complex than usual. The bottom-line question is if you have a long-term pattern of gifting, how will these gifts be treated for various purposes, including Medicaid.
Let’s start out by making clear that a gift is a gift is a gift, no matter your pattern of gifting or reason for the gifting. The question then becomes (1) can an agent continue your pattern of gifting; (2) is the gift subject to gift tax; and (3) is the gift penalized for Medicaid purposes if caught in the look-back period.
First, the whole concept of consistent giving over time is really not a tax or Medicaid issue, per se, but rather guidance to a fiduciary (agent under a power of attorney or trustee) to determine what actions the fiduciary can take on your behalf. In other words, if the fiduciary sees that you have been gifting money every year, they may continue to do so.
Second, since it is a gift in any event, a gift tax return is supposed to be filed if the gift exceeds $15,000 per year per person. Whether or not the gift tax return is actually filed is a topic for another day.
Third, all gifts (pattern or not) that are caught in the relevant look-back period will be assessed by Medicaid and probably penalized, and future gifts based upon a pattern are completely disallowed. However, there is an underutilized rule that if a transfer (gift) was made for some purpose, other than to qualify for Medicaid someday, then no penalty will be assessed, even if caught in the look-back. This one is tricky. To begin, you will probably be denied Medicaid but can challenge this assessment on appeal with all the delays and expenses that go with it. But if you can prove, on appeal, that the gifts were to fund an insurance policy or to fund a Roth IRA, (normal estate planning practices) then maybe we can get these excluded. It also may depend upon your health. If you were heading to a nursing home when you gave these gifts, then that fact would go against you.
Fourth, if the real question is can you continue to pay for your life insurance or fund your Roth IRA, once you are otherwise eligible for Medicaid because you have a pattern of doing so, the answer is no.
Obviously, this is all more complicated, but I hope this gets all of you thinking.
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Until next time…
peace, health and happiness,
Lawrence Eric Davidow