“How much can I give away?” This is one of the most common questions we hear, particularly from clients concerned about preserving assets in light of the costs of long term care. Our immediate answer is that people can give away as much of what they own as they want (this still being the USA, after all). That usually provokes two further questions – how about the $13,000 (some people still say $10,000) annual gift limit and how about the Medicaid 5-year look-back period.
The first thing to know is that the “annual gift limit” relates to federal tax law, and the look-back period to Medicaid (and other programs) eligibility. The two are completely unrelated.
Current federal law taxes a person for gifts that exceed a lifetime total of $5 million dollars. Since the tax is based upon an accumulation of gifts, the IRS needs to keep track of how much I give away throughout my life. It does so by requiring that I file a gift tax return and report my generosity. But, since the government doesn’t want to “sweat the small stuff,” one can give $13,000 per person per year without needing to file a return, and such “small gifts” don’t reduce one’s $5 million lifetime total.
Medicaid (and, for that matter most public assistance programs), on the other hand, is interested in discouraging people from impoverishing themselves so as to qualify for benefits. Its rules require me to disclose all gifts of any consequence that I have made in the five years preceding my application for help. And if the help I’m looking for is in paying nursing home or assisted living costs, or the costs of in-home care, then a penalty applies.
That penalty is a period during which government assistance to pay such costs will be withheld despite the fact that I am otherwise eligible. The length (in months) of the penalty depends upon the total of my gifting during the five-year look-back period, and is computed by dividing the gift total by the average monthly cost of nursing home care – currently $6,023.
So, while there is no law that prohibits me from giving assets away, there are consequences that may flow from my generosity, including possible gift taxes and ineligibility for public assistance. Of course there are other real-life results depending upon what or how much one gives to others. It is always worthwhile to discuss significant gifting with someone who can help evaluate its wisdom.