The Federal Annual Gift Tax Exclusion


Dec 17, 2013

The Federal Annual Gift Tax Exclusion Does Not Apply to Transfers Regarding Eligibility for Medicaid Long-Term Care Benefits

Many people mistakenly believe the $14,000 per person, per year, federal gift tax exclusion is the allowable gifting limit for Medicaid-related transfers.  Clients often tell us that they transferred assets to a family member under the belief that so long as the gift to any one person is less than the $14,000 exclusion, they will not be penalized for Medicaid benefits eligibility should the need for long-term care arise within the five-year look-back period.  However, there is no allowable gifting limit for most transfers for Medicaid long-term care benefits eligibility purposes, and an applicant making gifts during the look-back period is usually penalized for eligibility purposes.  

The current rule is that all “uncompensated transfers” within the five-year look-back period are combined for purposes of determining the penalty period. For example, consider the recent case of “Millie”, a 75-year-old widow with $500,000 in cash. Millie has been making annual gifts since 2009 to each of her three grandchildren of $14,000 under the mistaken belief that doing so will not result in a penalty in the event she were to required extended long-term care and seeks eligibility for Medicaid benefits.  She embarked on this gifting strategy on the advice of her son-in-law, a respected accountant. 

In 2013, she suffered a stroke and now requires extensive rehabilitation care.  Medicare and her Medicare supplement policy pay for her care for the maximum of 100 days, at the end of which she still requires extensive assistance with several activities of daily living and therefore cannot be discharged home. When she applied for Medicaid benefits, the caseworker at the county Department of Social Services requested disclosure of all transfers Millie made within the five-year look-back period.  Millie disclosed that she gifted $42,000 a year beginning in 2009 for a total of $210,000 ($42,000 x 5 years). Millie was shocked when the caseworker informed her that she will be ineligible for benefits for one month for every $6,300 (the 2013 divisor) she gifted during the look-back period, or 33.33 months ($210,000 / $6,300). Worst of all, the caseworker informed Millie that the penalty will not start until she has spent down all but $2,000 of her cash, which she can do buying private paying for her care. That is, the 33.33-month penalty will not be imposed until after Millie is broke – a harsh rule indeed. This unfortunate result could have been avoided had Millie sought the advice of a certified elder law attorney.