Last month, I was asked by several couples following one of our educational events whether they should give away their assets to their adult children in order to qualify for Medicaid. In fact, this appears to be a very common question that many of our clients have regarding Medicaid and avoiding nursing home poverty. I was speaking to one couple from Hendersonville and they both had concerns about nursing home expenses in the coming years. They both explained to me that their parents and grandparents lived into their 90s, so that they had a concern of spending a lot of money on nursing home expenses in the future. This couple asked if gifting their home, bank accounts, and investment accounts out right to their adult children would help them qualify for Medicaid.
There are a number of reasons why you should never give outright gifts of your assets to your children just so that you can qualify for Medicaid. First, although each one of us love our children and know that our child would never take advantage of us during the end of our lifetime, there is always the possibility that it could occur. If you make an outright gift of your assets to your children, you lose all rights to those assets and your adult children are under no obligation to return those assets to you. In addition, you have no legal recourse in which to seek recovery of those assets.
Second, if you give outright gifts of your assets to your children, there are estate and gift tax consequences for those actions. The IRS allows anyone to give away as a gift up to $14,000 in any given year, or $28,000 of joint assets. If you give away more than $14,000 of individual assets or more than $28,000 of joint assets, then the amount over the limit reduces your lifetime federal estate tax exemption.
For example, let’s say John and Jane gave away $50,000 each year to their children for 10 years. From the context of the IRS, John and Jane have made a taxable gift in the amount of $22,000. In addition, over the course of 10 years, this turned into a taxable gift of $220,000. What this means is that John and Jane’s $5.43 million estate tax exemption would be reduced to $5.21 million. If John and Jane died with assets over $5.21 million, then their estate would be subject to the federal estate tax.
Finally, if you give outright gifts of your assets to your children, there are capital gains tax consequences for your children. The IRS says that when you give away an asset at your death it has what is called “step up in basis.” What this means is that the value of the asset on the date of your death is the value for tax purposes. Therefore, if that loved one who inherited that asset immediately sold the asset, then your loved one would not owe any capital gains tax. However, the IRS also says that if you give away an asset during your lifetime it has what is called “carry over basis.” What this means is that the value of the asset when you acquired the asset is the value of the asset that you gave to your loved one for tax purposes. Therefore, if that loved one turns around and sells that asset, then he or she would likely owe capital gains taxes.
For example, using the John and Jane example, let’s say that John and Jane gave away their house to their son, Jimmy, in order to qualify for Medicaid. Also, let’s further say that John and Jane bought the house in 1975 for $125,000 and today it is worth $450,000. If after John and Jane both pass away, Jimmy decides to sell that home for $450,000, then he would owe capital gains tax on the $325,000 gain.
After speaking with this couple who was concerned about future medical expenses in the nursing home, I recommended a possible solution. What I discussed with this couple was setting up an Irrevocable Medicaid Trust. What we would do is customize a trust for them that accomplished their goals and fund this trust with all of their assets. This would give this couple the benefit of having control over their assets, but still having the ability to protect their assets from nursing home expenses should they ever enter a nursing home in the future. However, I explained to them that in order to protect their assets from nursing home expenses and qualify for Medicaid, we would need to set up this trust and completely fund this trust at least five years before they went into the nursing home.