My mother lives in a nursing home and will soon go on Medicaid. Can she give me and my sister $10,000 each and still qualify?
Some people believe it's unethical to give money away to others knowing that the government — and thus taxpayers — will soon be stepping in to pay their bills. But in situations like your mother's, there are some common and — moral issues aside — perfectly legal techniques that will allow her to do just that.
It's called "Medicaid planning," and it helps people restructure their financial affairs in order to qualify for Medicaid, explains Marilee Driscoll, author of "The Complete Idiot's Guide to Long-Term Care Planning." It's not too late for your mother to take advantage of it, she says. Contrary to popular belief, people can use Medicaid planning strategies before or after they enter a nursing home.
The answer to your question is, yes, your mother can most likely give you and your sister some money instead of giving it all to the nursing home. (Medicaid recipients are typically left with a meager $30 to $90 in monthly personal-needs allowance, depending on the state in which they reside.) Just how much she'll be able to give now depends on a few factors, which we'll explain below.
Before we start, a word of caution: Medicaid regulations are state-specific, and it's important to consult an elder-law attorney before you do anything, says Driscoll. "This kind of planning is fraught with problems and the Medicaid offices often change how they interpret things," she says. "It's easy to make a mistake that really screws up everything." (We're also assuming that your mother is widowed or single. For married couples, different Medicaid planning strategies may apply.)
That said, here are the Medicaid planning basics. You may already know that most states allow nursing home residents to keep no more than $2,000 in countable assets (pretty much everything other than your home) in order to qualify for Medicaid. Needless to say, the Medicaid folks wouldn't like it if people could give all their assets away and qualify for Medicaid the next day, so they've imposed two basic restrictions, says Harry Margolis, an elder-law attorney in Boston and founder of Elderlawanswers.com.
The first restriction is the so-called "look-back period": 36 months for transfers to individuals and 60 months for transfers to irrevocable trusts. All Medicaid applicants have to report any gifts or transfers they've made within these time frames. For example, if someone gifted $50,000 to a child and applied for Medicaid 37 months later, Medicaid would ignore the gift. But if he or she applied less than 36 months after the transfer, Medicaid would take notice and apply its second restriction, known as the "disqualification period."
The disqualification period is the number of months following a transfer that one will be ineligible for Medicaid. It goes like this: Based on the average monthly cost of a nursing home in your state, you are disqualified for one month for each month's worth of expenses that you gift. Confused? An example should help.
Say you live in Colorado, where the average monthly cost of a nursing home is $4,965. (This is the official amount as determined by the state. For a list of states and key Medicaid figures, go to Elderlawanswers.com.) Based on this state-determined number, for each $4,965 you give away, you are disqualified from Medicaid for a month. So if you gave away $15,000, you'd be disqualified for roughly three months, a gift of $49,650 would disqualify you for 10 months, and so on.
Using this disqualification formula, Medicaid planners have come up with the so-called "half-a-loaf" method, which pretty much allows you to give away half of your assets and use the other half to pay your nursing home bills until you qualify for Medicaid. So let's say you have $50,000 and a nursing home in your state costs $5,000 a month. According to the half-a-loaf rule, you could give away $25,000, which would make you ineligible for Medicaid for the next five months. But that's OK, because you have — that's right — exactly $25,000 left to pay those nursing home bills out of pocket until Medicaid kicks in.
In real life, of course, things aren't so simple, explains Alexander Bove, a trust and estate attorney in Boston and author of "The Medicaid Planning Handbook." To start with, the actual cost of your nursing home might be different from the one set by your state. You might also have other expenses to cover during your ineligibility period, which means you'll be able to give less than half, or you might have additional income, which means you may be able to give more, he says. Again, a qualified elder-law attorney will help make the best of the situation.
Also, there are some exceptions to the restrictions above that might work to your advantage. For example, there's no ineligibility period for gifts made to disabled children or trusts set up for the sole benefit of any disabled person under 65, says Margolis. A Medicaid applicant can also spend his or her money, as long as it's for his or her own benefit. "Spending is fine; it's the giving money away that they don't like," he says. Qualified expenses include prepaying funeral costs or paying for the travel expenses incurred by relatives visiting the nursing home. But don't count on getting a car or a pair of diamond studs that the Medicaid recipient could pass on as inheritance later. Medicaid will look into any sizable purchases and determine if the applicant really needs them, Margolis explains. "They'll do the smell test," he says. "If it seems right, then it probably is." So while things like a TV or DVD player might pass the test, a Picasso surely won't, Margolis explains.
What about gift taxes? The gift tax kicks in when someone gives away more than $11,000 a year. In that situation, the person must file a Gift Tax Return Form 709 with his or her tax return. But, Bove says, no actual gift tax is due until the individual exceeds the lifetime gift tax exclusion amount, currently $1 million.