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What Gifting Will Disqualify You From Medicaid
Jan L. Warner & Jan Collins

Question: Because the $200,000 cost of my father’s long-term care almost bankrupted her, my mother (age 75) saw a lawyer to try to save the family home (worth about $100,000) and some of her remaining cash ($40,000) for my sister and me in case she also needed nursing home care. Because she is in relatively good health, the lawyer suggested that she give my sister and me a remainder interest in the family home and give each of us gifts of up to $11,000 per year.

The lawyer said that by doing this, she could continue living in the house during her life and take advantage of low property taxes. At her death, should my sister and I decide to sell the property, we would not pay a capital gains tax. He warned, however, that if she went into a nursing home in the near future, she would be disqualified from Medicaid because of these transactions.

Wanting a second opinion, Mom met with a financial planner who told her the opposite. He said that at Mom’s death, my sister and I would have to pay capital gains taxes if we sold the home and that, if Mother gave us money and then went to a nursing home within 36 months, the state would place a lien on our accounts and take the money back. Each said the other was wrong. Mom is not wealthy and sure doesn’t to get anyone in trouble with the government. With two professionals telling her different things, what do we do?

Answer: Just as lawyers should not give financial advice, financial planners should not give legal advice.

If your 75-year-old mother gives you and your sister a remainder interest in her personal residence, she will be making a gift to you and your sister of 53 percent of the value of her $100,000 home – or $26,500 each. In and of itself, this transaction will cause a Medicaid disqualification period that is calculated by dividing the total gift ($53,000) by the average monthly private pay nursing home rate in your state at the time of the transfer. If, for example, that rate is $4,000 per month, there will be a 13-month disqualification. While this transaction will require that your mother file a gift tax return next year, she will pay no gift taxes under the circumstances you describe. At the time of her death, you and your sister will receive what is known as a “stepped-up basis” in the home, assuming your mother meets the other requirements.

If your mother also gives you and your sister $11,000 each, this will add an additional five months to the disqualification period. This means that if your mother enters a nursing facility within the next 18 months and otherwise qualifies, she will not be eligible for Medicaid benefits. However, the Medicaid folks won’t come after you or your sister; Medicaid simply won’t pay for her care, meaning that you and your sister will have to foot the bill or she will be discharged.

While your mother was wise to seek a second opinion, we do not believe the advice she received from either professional was complete, as neither explained to her the dangers of losing control of her assets. If, for example, she wanted to move into a smaller home or needed to use the equity for other purposes such as repairs, she would not be able to make that decision without a summit meeting among the three of you. And, if you or your sister died, she would be dealing with your spouses or your children. And because her liquid finances are minimal, we don’t think it’s a good idea for her to strip herself of her only resources based on the potential of entering a nursing home. Other planning techniques may be available.

Taking the NextStep: The timing of gifts is most important and requires in-depth planning, which often means that lawyers and other professionals must work together. Turf wars between professionals is an unnecessary and counterproductive waste of time in this important multidisciplinary process.

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