Does the $13,000 Gift Tax Exemption apply to Medicaid?

When considering whether to make a gift, people often confuse the gift tax exemption with the medicaid gift rules. Here's a great article explaining this.

-- By K. Gabriel Heiser, Attorney

Many people are aware that there is some exemption for gifts, but the details are a little hazy. Usually it goes something like this, "I thought there was a $10,000 per person exemption for gifts, so there would not be a Medicaid penalty. No?"

First of all, the client is confusing a gift tax exclusion with a Medicaid gift exclusion.

Under federal gift tax rules, a "taxable" gift is made whenever one person makes gifts to another person of money or equivalent that exceed a total of (currently) $13,000 per year. (For many years this figure was pegged at $10,000, hence the confusion; now the exemption increases every few years to reflect inflation.) So making two gifts of $7,000 to the same person within the same calendar year will push you over the limit. But making one gift of $7,000 on December 31 and another the next day on January 1 does not push you over the limit, since the second gift is in the next calendar year. The "clock" is reset to zero every January 1, so to speak.

So what difference does it make if the gift is a "taxable" gift? It only matters if a person's lifetime taxable gifts will eventually exceed $1,000,000! And no client who is even thinking about applying for Medicaid is going to have that kind of dough. So as a practical matter it only means that there is an obligation to file a federal gift tax return if your gifts to one person in a calendar year exceed $13,000.

If you are married and one spouse makes a gift of, say, $20,000, to one person, by filing the federal gift tax return the couple can consent to "split" the gift. That way, each spouse is treated as having made a $10,000 gift, so neither will have made a taxable gift. Note that a federal gift tax return must be filed in order to split the gift; the fact of marriage alone will not affect the result.

Finally, note that only Connecticut and Tennessee still impose their own separate state gift taxes: CT exempts the first $2 million, but TN taxes gifts to an immediate family member that exceed $13,000/year. The rest of the states have no state gift tax, so if you live outside those two states and you're under the federal limit, you're all set.

What about Medicaid? Unfortunately, the general rule is that there is no exemption of any kind for a gift when figuring Medicaid penalties. If you give away $50,000 to one person or $10,000 to five people, it's all the same. The Medicaid folks simply tally up the total amount of gifts made within the last five years and divide by the average cost of a nursing home in your state to come up with the number of months of Medicaid ineligibility, starting on the day you apply.

Indeed there are exceptions for gifts to a spouse, or to a trust for a blind or disabled child, or of a gift of your home to certain people, etc. But for run-of-the-mill cash gifts to family members, be aware that any gifts you made within the five-year period prior to applying for Medicaid may well come back to haunt you, causing a period of Medicaid ineligibility.

K. Gabriel Heiser is an attorney with over 25 years experience in elder law and estate planning. Heiser is the author of “How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets,” an annually updated practical guide for the layperson. For more information about this book, visit Medicaid Secrets.

Here’s an article about Gift tax

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