by Larissa Bixler Stein

As discussed in Part I of this article, gifts can cause significant problems for persons who need Medicaid to help cover the costs of long-term care.  Large gifts made within five years of applying for Medicaid are subject to a transfer penalty, which essentially means Medicaid benefits are denied for a period of time. We find that many people have a general idea that the lookback period exists but operate under certain misconceptions about what constitutes a problematic gift.

  • Misconception #1: “We kept the gifts under $14,000 per year, so they don’t count…right?”   The IRS allows annual gifts under a certain amount without gift tax consequences, but that has absolutely nothing to do with Medicaid.  Gifts incur a transfer penalty for Medicaid purposes even if they were made within the parameters of the gift tax exemption.
  • Misconception #2: “But we bought it from Mom so it wasn’t a gift…right?” Not necessarily.  If you did not pay fair market value for the asset, then the difference between your purchase price and the fair market value of the asset is a gift.
  • Misconception #3: “Those payments from Dad to me were because I was taking care of him; they weren’t gifts because he was paying for something he otherwise would have had to hire a caregiver for…right?” Not necessarily.  Unless there was a “personal services agreement” in place at the time you rendered services, those payments will be presumed to be gifts for Medicaid purposes.  A personal services agreement is essentially an employment contract regarding caregiving services, and it must meet specific requirements to be acceptable for Medicaid purposes, one of which is that the agreement cannot be retroactive.  Unlike gifts, payments made pursuant to a personal services agreement are taxable income to the caregiver. Because the requirements for personal services agreements are so specific, it would be prudent to involve an elder law attorney to prepare the agreement.
  • Misconception #4: “We moved Mom in with us and would not have had enough room for her if we had not added on to our house, so it wasn’t a gift for her to pay for the addition…right?” Not necessarily. The government’s perspective is that, although your intent was to create room for your mother, the addition effectively increased the value of your home and ultimately benefitted you. Therefore, without adequate consideration to your mother, this could be considered a gift to you.  Be sure to get competent legal advice if you are planning on an arrangement like this to avoid problems with Medicaid qualification down the road.

As you can see transactions between family members or friends can be thorny when there is the possibility that Medicaid qualification.  If you or a loved one may require Medicaid assistance within five years, consider talking with a qualified elder law attorney before engaging in any transfers that could possibly be considered gifting.  When it comes to Medicaid, it is usually easier to prevent problems than undo them later.  Moreover, there are more planning opportunities available to those who plan ahead rather than waiting until a medical crisis makes long-term care imminent.  Please reach out to any of the attorneys at Garrity & Gossage if we can assist you with this important planning.

Larissa Bixler Stein is an attorney with Garrity & Gossage, LLP whose passion is helping those in North and South Carolina provide a more secure future for themselves and their loved ones through Wills, Trusts, Powers of Attorney, Guardianship, Probate, and Elder Law Services. Please note that this article is intended for general information purposes only, and is not legal advice. Legal advice depends on the specific facts and circumstances of each individual’s situation. Those seeking specific legal advice or assistance should contact an attorney.