Pennsylvania Medicaid Gifting VS. IRS Gifting

The most common non-VA benefit question I’m asked concerns the difference between Pennsylvania Medicaid gifting and IRS gifting.

Usually, the person asking the question is the child of a parent who is in their 80’s.  This parent frequently is not in good health.  Mom or Dad may have just moved into an assisted living facility or the child is thinking about such a move.  If Mom or Dad is still at home, they may receive some assistance with bathing or dressing.  If Mom or Dad isn’t receiving this assistance, they could probably use some help anyway.

The question can take one of two forms.

The first question is more general and goes something like, “I heard my Mom can gift about $14,000 to each of her children.  Is that true?”

The second question is a bit more specific and goes something like, “Is it true Dad can give the kids $14,000 every year and still qualify for Pennsylvania Medicaid?”

These are dangerous questions.  The answers can often interfere with the best plans of children and parents.  The answers may involve hard truths about finances and the prospect of future residency at a skilled nursing facility.

Unfortunately, questions about Pennsylvania Medicaid gifting and IRS gifting are dangerous because the family often takes action before receiving reliable information about the consequences of gifting.

Money once gifted is very hard to return.

Timing is crucial in elder law and estate planning.  Understanding the most opportune time to make gifts or create trusts is necessary to take advantage of advanced planning.  The following will briefly, and not completely, explain IRS gifting rules, Pennsylvania Medicaid gifting rules, and the differences between each.

Please be advised that this article is not legal or tax advice.  The reader should consult with an attorney or accountant before engaging in gifting.

IRS Gifting

A gift for IRS purposes is a transfer to someone else where full consideration is not received.  Full consideration means fair market value.  Fair market value means the price something would sell for between third parties that are both aware of the relevant facts.

Many know that the IRS lets people gift a certain amount every year tax free.  This is called the annual exclusion and is currently $14,000 per year.  Under the annual exclusion, a person (the donor) can make unlimited $14,000 gifts to as many people (donees) as he chooses without being subject to the gift tax in that year.  Neither the donor nor the donee is obligated to pay tax on the gift, though the donee is responsible for interest or dividends generated from the gift.

Very few people realize, however, that the IRS also allows a lifetime gifting exemption.  In 2016 this lifetime exemption is $5,450,000.

This means, in effect, that 99 percent of people can make unlimited gifts in a given year and still be exempt from the gift tax.

For example, if Mom gifts $100,000 this year to her daughter, she is $86,000 above the annual gift exclusion.  However, Mom is $5,350,000 below the lifetime exemption.  To avoid paying tax on the $86,000 (the difference between the gift and the annual exemption), Mom would need to complete Form 709.

The only catch to these generous IRS rules applies to the very wealthy.  If lifetime gifting exceeds the $5,450,000, then the entirety of the taxable estate is subject to the federal estate tax.  This is different that the Pennsylvania inheritance tax.  Another way to think about this is that any gifts made are offset against the lifetime exemption.  So if a person gifts $1,000,000 during their lifetime, they lose $1,000,000 in tax exemptions upon death.

Pennsylvania Medicaid Gifting

The Department of Human Services applies a 60 month look-back period to applicants applying for long-term care benefits in Pennsylvania.  This means that most gifts made within 60 months of submission of a Medicaid application will cause a penalty period.  During this penalty period the applicant will need to private-pay the cost of the skilled nursing facility.

The penalty period is determined by the amount transferred for less than fair market value and the average monthly cost of a Pennsylvania skilled nursing facility.  The penalty period generally does not start when the gift was made but rather when the applicant for Pennsylvania Medicaid is otherwise eligible.  This is an important concept to understand but is generally misunderstood.

If an applicant gifted money or other property within the 60 month look-back period, he or she can “cure” the gift and avoid the penalty period.  A gift is cured when it is returned.  As previously mentioned, however, curing does not often occur.  Money gifted is generally quickly spent.

The situation can be more complicated and more unpleasant when gifts are made to multiple siblings.  Sometimes one sibling doesn’t spend the gift but one or more siblings will have spent all or part of the gift.  When this family learns about the consequences of gifting, and the reality that Mom and Dad may have to private pay even when they are out of money, hard feelings can arise.  Gifting can also impact the community spouse resource allowance.

Timing Is Everything

IRS gifting and Pennsylvania Medicaid gifting should not be done haphazardly and without a plan.  Gifting should be executed according to a well thought out plan that accomplishes the donor’s goals.

Ninety nine percent of people can engage in gifting and see no adverse consequences with the IRS.  This is because most people do not have estates large enough to conflict with the federal estate tax.

Conversely, gifting can negatively and seriously impact an applicant’s PA Medicaid nursing home eligibility.  The proper time to engage in gifting is before you are seriously ill.  Engaging in gifting while healthy maximizes the chances that the Pennsylvania Medicaid eligibility will not be impacted by the look-back period.

Advanced planning is the best way to prepare for future healthcare costs.  Given that the VA Aid and Attendance benefit is likely to undergo serious changes in the next 12 months, advanced planning is more important than ever.

It is crucial to understand that the IRS gifting rules are entirely separate and unrelated to gifting rules for PA Medicaid nursing home eligibility.  Confusing these rules can result in delayed Medicaid long term care eligibility that impacts parents and children.

We recommend speaking with an attorney familiar with benefits and drawbacks of outright gifting and other planning strategies.