Understanding the Impact of Gifts on Future Medicaid Eligibility

Without proper legal and financial advice, families sometimes take actions that seem innocent enough at the time, but which later may cause the family all sorts of grief.  Perhaps the most common error is when a parent or grandparent makes gifts to a younger family member without considering the impact such gifts will have on the donor’s potential Medicaid eligibility.  Many people have at least a vague understanding that they are “allowed” to make annual “tax free” gifts of up to $13,000 per beneficiary.  Such gifts, however, may prevent the donor from being eligible for nursing home Medicaid benefits if such gifts are made within five years prior to the donor applying for Medicaid.  As a general rule, gifts made within the five year “look back” period from the date a Medicaid application is filed will create a Medicaid “penalty period” based on the following formula:  the amount of total gifts during the look back period, divided by the “Regional Rate” for private pay nursing home care established each year by the New York State Department of Health.  For 2011, the Regional Rate for the Northern Metropolitan Region is $10,105 per month. 

The potentially dire consequences of this Medicaid penalty formula can be seen in the following example:  assume that in 2010 an Orange County resident in declining health made gifts of $50,000 apiece to each of her two children.  Soon thereafter the mother entered a nursing home and spent her remaining resources to pay for her long-term care.  By July 2011 the mother had “spent down” to the Medicaid eligibility limit of $13,800, and the children were advised by the nursing home to file a Medicaid application on their mother’s behalf.  Based on these facts, mom would be approved for Medicaid, but with a catch: the $100,000 in gifts made during the look back period would result in a period of Medicaid ineligibility for 9.9 months ($100,000 divided by $10,105). Mom would be responsible to pay the ten months of nursing home expense during the penalty period, but without any means to pay it!  Since the nursing home will surely not want to absorb that cost, it may decide to try to evict mom from the home and/or file a lawsuit against mom and the children to recover the gifted funds, typically on a theory of “fraudulent conveyance.”

While the family may contend that such gifts were for a purpose other than to qualify for Medicaid, the legal presumption is that all gifts within five years of the Medicaid application filing are subject to a Medicaid waiting period.  The law puts the onus on the donor to prove – usually at an administrative “fair hearing” – that the gifts were made, for example, to help a child in financial difficulty, or as part of an annual gifting program.  If such arguments are unsuccessful, then the gifts, if not returned to the parent or grandparent, may leave the senior unable to pay for needed long-term care. 

 

I do not mean to imply that gifts to family members should never be made.  Rather, it is critical that before gifts are made, the parent or grandparent review the gifts with an elder law attorney to understand the potential impact of the gifts in the Medicaid context.  A clear paper trail should be established to show both the source and the purpose of the gifts.  For example, if a parent wishes to give a son and daughter-in-law $25,000 towards the down payment on a home, a notation in the check memo (gifts should always be made by check or other traceable source) should specifically state “gift for home down payment”.  Should the parent suffer a decline in their health and seek nursing home Medicaid assistance within five years of having made that gift, the memo entry will provide support for the claim that the particular gift was for a purpose other than to help the parent qualify for Medicaid, and therefore should not result in a Medicaid “penalty.”

Not All Gifts Will Disqualify You From Medicaid Eligibility

It is commonly believed that if a senior makes gifts to family members and subsequently needs long-term care services within five years after making the gifts (the five-year window being commonly referred to as the “look-back” period), such gifts will automatically cause a period of Medicaid ineligibility. While the statutory presumption is that all gifts during the look back period will affect the donor’s subsequently Medicaid eligibility, there are a number of exceptions to the general rule.

One important exception to the transfer penalty rules is set forth in Section 366.5(d) of the New York Social Services Law. Under that provision, gifts made during the look back period will not create a period of Medicaid ineligibility for the donor if a “satisfactory showing is made that … the asset was transferred exclusively for a purpose other than to qualify for Medicaid.”

A 2009 case out of Suffolk County shows the importance of this rule. In that case, an 83 year-old widow (“Mrs. X”) suffered a fall in late 2008 and needed nursing home care. Prior to the fall the woman had been in good health and lived comfortably in her own home.

Beginning in March 2006 and continuing through July 2007, Mrs. X made gifts to various children and grandchildren totaling $71,000. Critically, the testimony showed that Mrs. X’s children were going through various financial hardships – one son was in and out of the hospital and had significant medical bills; another son had lost a job and was teetering on the edge of bankruptcy. Other children and grandchildren needed help to keep up with their own living expenses. The Hearing Examiner noted that even after the gifts, Mrs. X remained financially solvent and was able to comfortably meet her living expenses.

Shortly after Mrs. X entered the nursing home in December 2008, she applied for Medicaid coverage to cover her nursing home expenses. The Suffolk County Department of Social Services (“DSS”) approved her eligibility, but under the transfer penalty rules imposed a six month “penalty period” on account of the $71,000 gifts made by Mrs. X to her family. After DSS’s determination, Mrs. X’s daughter was able to recover from some of the children only $28,000, leaving Mrs. X without the means to cover the nursing home costs during the bulk of the penalty period.

Mrs. X challenged DSS’s imposition of the penalty period, claiming that her gifts were made for a purpose other than to qualify for Medicaid and fell under the exception to the transfer penalty rules found in Social Services Law Section 366.5(d). In her decision, the Hearing Examiner agreed with Mrs. X’s claim that, despite her relatively advanced age, “the gifts were made at a time when there was absolutely no indication that [Mrs. X] would need nursing home level of care,” and that “the record failed to establish that [Mrs. X] made any of the gifts in order to qualify for Medical Assistance.” Accordingly the Hearing Examiner reversed DSS’s imposition of a six month penalty period, rendering Mrs. X immediately eligible for nursing home Medicaid.

Implicit in this decision is the importance of having the right facts. If Mrs. X had evidence of chronic health conditions (e.g., early dementia, arthritis, etc.) at the time the gifts were made, it is almost certain that DSS imposition of a penalty period would have been upheld. But in a circumstance such as Mrs. X’s case where a senior in seemingly good health has made gifts to family members but then suffers a sudden decline in health, a strong argument can be made that the statutory exemption under Social Services Law Section 366.5(d) should apply, precluding DSS from imposing a Medicaid penalty period.

Common Estate Planning Myths

In my over two decades of practicing law, I have heard the same estate planning myths repeated time and time again. Here are some of the most common misconceptions:

1. The surviving spouse automatically assumes ownership of the deceased spouse’s assets – many people believe that by the mere existence of a marriage, the surviving spouse inherits the deceased spouse’s individually owned assets upon the spouse’s death. Unfortunately, the law makes no exception for a surviving spouse. If assets are owned only in one spouse’s name, upon that spouse’s death his or her estate will need to be administered via a probate proceeding. If the decedent had a will, the assets will pass as directed under the will (typically to the surviving spouse). If there is no will, then the deceased spouse’s individually owned assets will pass under the state’s intestacy rules. In New York, if a person dies with no will leaving a spouse and children, then the bulk of the deceased spouse’s assets will pass as follows: fifty percent to the surviving spouse, and fifty percent among the deceased spouse’s children –a result that few married couples desire.

2. It is too late to protect your assets if you are in (or about to enter) a nursing home – It is commonly believed that a person already in, or about to enter, a nursing home must “spend down” all their assets before becoming eligible for nursing home Medicaid coverage. In reality, even in such a “crisis” situation fifty percent or more of the Medicaid applicant’s assets can typically be preserved.

3. Gifts to any individual in excess of $13,000 per year will require the payment of gift tax – In addition to the $13,000 “annual exclusion” gifts that any individual may make to any other person (excluding a spouse, to whom unlimited gifts may be made), there is also a $1 million lifetime per person gift tax exemption. So, it is quite rare that anyone making gifts will ever actually have to pay a gift tax. For example, if a parent makes a $23,000 gift to a child, the first $13,000 of the gift would be applied against the annual exclusion amount. The remaining $10,000 portion of that gift would result in a $10,000 reduction of the parent’s $1 million lifetime gift exemption. If the parent had never utilized any portion of their lifetime gift exemption, then they would have $990,000 of that exemption remaining. The $10,000 portion of the gift in excess of the annual exclusion amount would be reported on a form 709 federal gift tax return, but no tax would be owed.

4. Life Insurance is “tax free” – In the vast majority of cases that I review, the insured under a life insurance policy is also the owner of that policy. In such a circumstance, when the insured dies, the death benefit will pass to the named beneficiaries’ income tax free. However, the entire death benefit will be includable in the insured’s estate, thereby rendering the death benefit subject to estate taxes. This rule applies even to term policies. For example, assume a New York resident who owns a $1.5 million term life insurance policy and $1.5 million in other assets were to die in 2011. Under current law, his estate would owe $945,000 in state in federal estate taxes. If instead the $1.5 million life insurance policy were owned in a “life insurance trust,” the total estate tax liability would be reduced to $210,000 – resulting in a tax savings of $735,000!