By Andrea K. Kovar, Attorney, Generation Law

It’s the season of giving, but beware!  Gifting assets could affect your Medicaid eligibility for long-term care benefits down the road

Your heart may be in the right place when making gifts to family members and loved ones during the holiday season, but your generosity could end up costing more than you ever expected if you need Medicaid to help pay for long-term care costs in the future.

Gifting and Medicaid are like oil and water – they do not mix. If a Medicaid applicant makes a gift within the five-year period (“look-back period”) preceding an application for Medicaid long-term care benefits, the Illinois Department of Human Services or IDHS (the government agency that administers the Medicaid program for long-term care) will assess a “transfer penalty” against the applicant in the form of a period of ineligibility. IDHS calculates the penalty by adding up all gifts made by the applicant or the applicant’s spouse within the look-back period and dividing that number by the applicant’s monthly cost of care.

What kind of gifts are penalized?

Medicaid has strict rules about gifts. Generally, if you give away more than $500 to anyone for any reason in any given month (this amount is not a given), your gift will result in a transfer penalty. The more you give away, the longer the period of ineligibility. Think about things like (1) gifts for birthdays, holidays, graduations, and weddings, (2) gifts to charities, (3) buying something for a friend or relative, and (4) selling assets under fair market value (e.g., selling your house to a family member at a steep discount).

Are there exemptions?

Exemptions exist though they are very specific. These include but are not limited the following:

  • Gifts or transfers to an applicant’s spouse living in the community, or to another (e.g., trust) for the spouse’s benefit (subject to limits) if the spouse is not also applying for Medicaid and continues to lives in the community.
  • Transfers to a child that is blind, disabled, or under 21 years of age, or to a trust specifically established for the sole benefit of the child.
  • Transfers of the primary residence, but only to certain parties:
    • To the community spouse;
    • To a child that is blind, disabled, or under 21 years of age;
    • To a sibling if that sibling owns an interest in the home and was living with the applicant for at least a year before the applicant entered the nursing home;
    • To their adult child if the child was living in the home with the applicant for at least two years prior to the applicant entering a nursing home and, during that two-year period, provided care to the Medicaid applicant (i.e., without the child acting as caregiver, the applicant would have otherwise required an institutional level of care).

How does an applicant pay for care during the penalty period?

The applicant likely will not be able to pay for care during the penalty period! Medicaid rules provide that a single individual applying for benefits cannot have more than $17,500 in total assets in his or her name at the time the application is submitted. Unless the gifts are paid back or the applicant has family members willing/able to pay for care during the penalty period, the assisted living or skilled nursing facility will likely deny the applicant admission.

What if my gifts do not exceed the federal gift tax exemption amount?

We hear this question quite frequently when advising on Medicaid eligibility matters.  In 2023, the federal gift tax rules allow individuals to gift up to $17,000 per recipient without filing a gift tax return.  However, federal tax rules and Medicaid eligibility rules are completely separate from one another – gifting under federal gift tax rules violates Medicaid’s look-back period.

Moral of the story?

If there is anything to be learned here it is that you should consult with an attorney if you are contemplating making gifts this holiday season (or anytime during the year). Very few people expect to need Medicaid assistance to pay for long-term care until the need actually arises. By then, it’s often too late to address gifting within the look-back period.