Case Study: Financial Gifts to Children

The state won’t let you just give away your money or your property to qualify for Medicaid.

After her 73-year-old husband, Harold, suffers a paralyzing stroke, Mildred and her daughter, Joan, need  advice. Dark circles have formed under Mildred’s eyes. Her hair is disheveled. Joan holds her hand.

“The doctor says Harold needs long-term care in a nursing home,” Mildred says. “I have some money in savings, but not enough. I don’t want to lose my house and all our hard-earned savings. I don’t know what to do.”

Joan has heard about Medicaid benefits but doesn’t want her mother left destitute in order for Harold to qualify for them. Joan wants to ensure that her father’s medical needs are met, but she also wants to preserve Mildred’s assets.

“Can’t Mom just give her money to me as a gift?” she asks. “Can’t she give away $15,000 a year? I could keep the money for her so she doesn’t lose it when Dad applies for Medicaid.”

Joan has confused federal gift tax law with the issue of transfers and Medicaid eligibility. A “gift” to a child in this case is actually a transfer, and Medicaid has very specific rules about transfers.

At the time Harold applies for Medicaid, the state will “look-back” five years to see if any gifts have been made. The state won’t let you just give away your money or your property to qualify for Medicaid. Any gifts or transfers for less than fair market value that are discovered during the look-back period will cause a delay in Harold’s eligibility for Medicaid.

For example, a $15,000 gift during each of the five years (a total of $70,000) prior to a Medicaid application creates a 6.5-month period of ineligibility. This penalty period will not begin until:

1) Harold is in a nursing home, 2) he is under the asset and income requirements, and 3) he applied for Medicaid. Starting at the latest of those three dates, Medicaid will not pay for Harold’s nursing home care for 6.5 months.

So, what can Harold and Mildred do? They can institute a plan, save a good portion of their estate, and still qualify for Medicaid. The plan may involve transfers of money for value received, such as a care contract, and it may involve certain gifts. However, as we stated above, the gifts must not violate the federal law or the Medicaid rules. Generally, if done properly, a married couple can often save almost all of their assets.

But remember, when it’s given away, it’s given away. Studies have shown that “windfall” money received by gift, prize, or lawsuit settlement is often gone within three years. In other words, even when the children promise that money will be available when needed, their own “emergencies” may make them spend the money. You must consult a knowledgeable elder law attorney on how to create a plan that complies with the law and achieves your goals.

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