When seniors and their families are planning for long-term care, a common question that arises is, Why can’t we just start giving our money or assets to our loved ones or family members now?
In a common scenario, a parent may decide to give real estate – like a primary residence or a family beach house – to family members with the belief that divesting of the property will aid in Medicaid eligibility. Depending on the circumstances, however, there may be many good reasons to avoid this kind of uncompensated transfer.
Any such gift should be avoided if there is any possibility that (1) the senior may need long-term care in the five years following the transfer, and (2) the senior cannot afford to pay for long-term care for the five-year period. If the senior cannot afford to pay for long-term care for roughly five years, the senior may need to rely on other sources, like long-term care insurance, Medicaid or Veterans benefits to defray costs.
Because some conditions like a stroke cannot be anticipated and may require nursing care, outright gifting is not generally a primary strategy for Medicaid eligibility because of the concern of creating a penalty during the five years before a Medicaid application (called the “look-back” period). Currently, the Veteran’s Administration does not impose any look-back penalties, but those rules could change.
If a Medicaid applicant has gifted or transferred property within the five years preceding a Medicaid application, Medicaid could assess a penalty. The penalty is usually assessed for gifts or transfers that were made for less than fair market value.
Under North Carolina Medicaid rules, the penalty is calculated by dividing the monetary value of a gift by 6,300. So, if a parent gifted her children with a beach house valued at $630,000 and the children did not offer the parent any money in return for the gift, a penalty of 100 could be assessed if the parent applies for Medicaid within five years of the gift.
In the beach house example, the penalty of 100 equates to 100 months that the parent would have to wait for Medicaid to cover the costs of care after the parent is otherwise eligible for Medicaid. While this penalty period is lengthy, the timing of the penalty becomes significant because the penalty can only start when the parent has $2,000 in assets and needs nursing care. In these circumstances, the senior will have to rely on children or other family members to wait out the penalty period.
If the penalty period is not a big enough deterrent, there are other reasons to avoid gifting. Sometimes, a parent seeks to gift a house to children, but the parent wants to remain in the home and pay for the taxes and insurance on the home. Insurance companies may not allow the parent to keep an insurance policy in the name of the parent on the grounds that the parent no longer has a legally insurable interest in the property.
Finally, gifts could result in unintended tax consequences. The parent’s gift of a beach house could require a gift tax return by the parent. The gift could also mean the children lose the parent’s stepped-up basis in the value of the property, which might create capital gains taxes when the children sell the property.
Because planning for long-term care can present complex rules, seniors and their families should consult an elder law attorney for help with planning.