The laws, considerations and consequences involved in paying for long-term care are complicated. No matter how well-meaning “friends who’ve been through it,” facility business offices and agencies intend to be, the laws change often, and misconceptions abound. This is the third article of a three-part series on Misconceptions about Paying for Long-term Care.
Misconception #3: “I can give away $15,000.00 per year”
When I meet with a client concerned about where the money is going to come from to pay for their loved one’s long-term care at home or in a nursing facility, I ask whether there have been any gifts within the past five years. If there have been, I often receive the response that “my accountant told me I could give away $15,000.00 per year and have no negative tax consequences.” There are separate rules and consequences on gifting for different areas of the law.
Inheritance tax and federal estate tax consequences
Pennsylvania has inheritance tax which is assessed on the value of your assets as of date of death (with a few exceptions). That rate of inheritance tax ranges from zero percent to 15% depending upon who will be inheriting your assets when you pass away.
There is also a federal estate tax of 40% if you pass away with more than $11.58 million in assets. Every person has a $11.58 million lifetime exemption from federal estate tax. In addition to the lifetime exemption amount, Section 2503(b) of the Internal Revenue Code permits a federal gift tax exemption for gifts of $15,000.00 per person per calendar year. Those yearly gifts do not decrease the lifetime exemption amount. For example, if you are married and you each give each of your four children the maximum yearly gift, you would have given away $120,000 (2 spouses x $15,000 each x 4 children) without decreasing your lifetime exemption.
Gifts that are within the exemption from federal estate tax are still subject to the Medicaid transfer penalty rules. Under the current policy, any gifts that exceed a cumulative total of $500.00 in a calendar month and that are made within the five years prior to the application for Medicaid create a period of ineligibility for Medicaid, with some limited exceptions. You and your spouse could not give each of your children $500.00 per month without creating a period of ineligibility. The maximum gift combined from both spouses to all four children would be $500.00 total per calendar month. And the state does not permit you to “catch up” on the monthly gifts and pay for the previous months of the year that you missed. While the law permits these negative gift consequences to be cured by a full return of the gift, often the recipients have spent the money.
If you have made gifts in excess of $500.00 per calendar month within five years of date of application for Medicaid, and the money is no longer able to be returned, there are still techniques to be considered. Get expert legal advice instead of embarking on a do-it-yourself path.