How Gifts Made Today Might Affect Future Medicaid Eligibility

How Gifts Made Today Might Affect Future Medicaid Eligibility

April 23, 2024

How Gifts Made Today Might Affect Future Medicaid Eligibility

Over the past three years, several of our clients’ parents have found themselves entering into a “Medicaid Spend-down” as they look to the state of Connecticut to provide them with significant financial assistance, courtesy of Title XIX. Some of them have considered trying to speed up the Medicaid Spend-down process by gifting a lot of money to their kids—our clients—who are, in turn, questioning the wisdom of doing that while also wondering what the tax consequences might be.  

This is a fairly complicated issue, and several important factors must be considered before any money is given away.

Taxes Owed On Gifts

First of all, contrary to popular belief, gifting normally does not create any immediate tax liability whatsoever unless the dollar amounts are extremely large. That’s because everyone has a Lifetime Exclusion, and that limit—which typically increases each year—is currently $13,610,000. 

That is, you can give away $13,610,000 over the course of your lifetime without owing any taxes on those gifts. Only after you’ve given away $13,610,000 any subsequent gifts will create a tax liability. Plus, you’d owe taxes only on those subsequent gifts. The initial $13,610,000 that you gave away earlier will remain permanently free from taxation.  

(Estate taxes will likely come into play, however, so if you’re thinking of making gifts that may cumulatively approach that impressive threshold—or make a substantial dent in it—it would be wise to consult with an Estate Planning Attorney. And it would be prudent to do that sooner, rather than later, before any large-scale gifting has begun.)

Your spouse can also give away $13,610,000, which means that between the two of you, you could conceivably give away a total of $27,220,000, without owing any Gift Taxes. 

If and when you breach that rather formidable threshold, all further gifting will be taxable—but only to the giver of the gift, not to the recipient. The recipient does not have to pay taxes on a gift they receive.

Note: If you do ever end up owing Gift Taxes, the tax rate on those future gifts (once you’ve exceeded your lifetime limit) is pretty steep—between 18% and 40%, depending upon how large your “post-$13,610,000” gifts are.

In addition to the lifetime gifting threshold, there is also an annual gifting exclusion. Most people are already familiar with that, although I’m always surprised by how many think the limit is still $10,000 per year. The limit goes up regularly, and the current annual limit (in 2024) is now $18,000. 

That’s the “free pass” amount. That is, if you give $18,000 or less to any one person, you will not owe any taxes on that gift, and you will not even have to file a Gift Tax Return.  

But if you do give more than $18,000 to any one person, then you will be required to file a Gift Tax Return—which is normally filed at the same time as your annual Income Tax Return.

For example, let’s say you give your adult son $25,000 in 2024. As a result of that, you’ll have to file a Gift Tax Return in April 2025. 

But you still wouldn’t owe any actual taxes (unless you’d already breached the daunting $13,610,000 lifetime limit). You would simply subtract a portion of that $25,000 gift from your lifetime limit.  

That is, you’d file a Gift Tax Return, on which you would first deduct $18,000 (the “free pass” amount) from that $25,000 gift. Then the remaining $7,000 would be subtracted from your lifetime limit. If this was the first time that you’d ever exceeded the annual “free pass” amount, your $25,000 gift would leave you with a new, remaining Lifetime Exclusion of $13,603,000.

Of course, you can gift money to more than one person each year, and still remain safely under the annual “free pass” amount. For example, if you have two adult children—both of whom are married—you could conceivably give each of them—and both of their spouses—$18,000 apiece, without owing any taxes, and without having to file a Gift Tax Return. That is, it would be possible for you to give those four people a combined total of $72,000 in one tax year, and still get a “free pass” on all of it.

Not only that, but if you’re married, your spouse could do the exact same thing, too, and also give those same 4 people an additional $18,000 each. That is, between the two of you, you and your spouse could give your 2 kids and their spouses a total of $144,000 in one tax year, without having to pay any taxes on that money, and without either of you being required to file a Gift Tax Return.  

(This also means that your lifetime tax-free gifting ceiling is not actually $13,610,000. It’s really $13,610,000 plus the sum total of all of the “free pass” amounts that you ever gave away, which, as we’ve just seen, could potentially add up to a very large number. If you give away $18,000 apiece to 4 different people this year, for example, that combined $72,000 would—all by itself—effectively push your true “gift ceiling” up to $13,682,000.)

That all sounds pretty good, right?

How Prior Gifting Adversely Affects Medicaid Eligibility

Here’s where it gets tricky, though.

Medicaid eligibility does not follow the annual “$18,000 free-pass rule.” All gifts—of any dollar amount whatsoever—are taken into account when someone applies for Medicaid assistance. There is no dollar amount at all that is disregarded.  

Also—and this is critically important—there is currently a 5-year look-back period in effect in Connecticut, as well as in nearly every other state.

That is, if someone has given away any money at all—gifts to family members, or to any other person—at any point in the 60 months preceding a Medicaid Application, those gifts can result in a significant additional waiting period, extending the time until the needy person or couple can begin receiving financial assistance from Medicaid. Unless an entire gift can be returned—100% of it—an additional “waiting period” will begin on the date that their Medicaid Application is approved.

Note: If a gift has been made at any point in the past 5 years, the date on which that gift was made is totally irrelevant. The waiting period until financial assistance from Medicaid begins will be exactly the same, regardless of whether that gift was made 3 weeks ago, or 59 months ago.

Here’s an example. 

Let’s say your father gave you $25,000 four and a half years ago—and that neither he nor your mother made any other gifts at all in the past 5 years—and today your mother is facing enormous medical and custodial care bills, and your parents need to apply for Medicaid assistance. 

If your mother already would otherwise fully qualify for financial assistance from Medicaid today, that prior $25,000 gift will cause your parents to have to wait an additional 1 month and 22 days before Medicaid begins providing them with any financial assistance. That’s because—in Connecticut, in 2024—for each $14,524 that was given away, they must now wait an additional month until any financial assistance from Medicaid can begin. (The waiting period is pro-rated, on a daily basis.)  

If we look at a more extreme case—a slight twist on the other example from the first half of this article—and assume that 56 months ago your father gifted a total of $72,000 to you, your sibling, and both of your spouses—$18,000 apiece—and that your mother also gifted the 4 of you an additional $72,000—those long-ago gifts will now result in an additional waiting period of 9 months and 27 days.  

It’s critical to understand that when applying for financial assistance from Medicaid, all assets that either spouse owns solely are considered to be joint assets, including 401ks, IRAs and any separate bank accounts. The same is true with past gifts made. Any gifts that your father made will be lumped together with any gifts that your mother made, and in this hypothetical example, the total that they gave away was $144,000 between the two of them—which means they’ll now have to wait nearly 10 additional months until Medicaid will begin providing them with any financial relief.

Bottom Line

Please remember that it’s very important to carefully consider everyone’s current and projected future health status—as well as to review family health histories, and look for additional clues, indications, or tendencies—before giving away large sums of money. Especially if you’re not young anymore. If your parents unexpectedly need to embark upon a Medicaid spend-down a few years from now, the 5-year look-back period could come into play, and today’s generous gifts could come back to bite them—and you.