Many people believe that if they give away an amount equal to the annual gift tax exclusion – currently $14,000 to any one individual – this gift will be exempted from Medicaid’s five-year look-back at transfers that could trigger a waiting period for benefits. Nothing could be further from the truth.
The gift tax exclusion is an IRS rule. Any person who gives away $14,000 (in 2014) or less to any one individual does not have to report the gift or gifts to the IRS. If you give away more than $14,000 to any one person (other than your spouse), you will have to file a gift tax return. However, this does not necessarily mean you’ll pay a gift tax. You’ll only have to pay a tax if your reportable gifts total more than $5.34 million (2014 figure) during your lifetime.
This IRS rule has nothing to do with Medicaid’s asset transfer rules. While the $14,000 that you gave to your grandchild this year will be exempt from any gift tax, Medicaid will still count it as a transfer that could make you ineligible for nursing home benefits for a certain amount of time should you apply for them within the next five years. You may be able to argue that the gift was not made to qualify you for Medicaid, but proving that is an uphill battle.
If there is a chance you will need Medicaid coverage of long-term care in the foreseeable future, see me before starting a gifting plan.