Many people who are beginning to plan for Medicaid ask the question, “can you gift money before applying for Medicaid?” Many taxpayers mistakenly believe they can use the Annual Gift Tax Exemption to give away money to become eligible for Medicaid benefits. The IRS Annual Gift Tax Exemption allows a taxpayer to give money or real estate to another person tax-free, up to a certain amount. The Annual Gift Tax Exemption amount changes, but there is no limit on how many tax-exempt gifts a person can make each year.

However, the IRS and Medicaid apply completely separate rules, and every gift made in the 60 months before applying for Medicaid counts toward the Medicaid transfer penalty. The transfer penalty does not begin on the date of the gift. Instead, it starts from the date the individual would otherwise become eligible for Medicaid. This means a person or family can give money away and spend down in an effort to qualify for Medicaid only to discover they still have months of ineligibility.

Key Takeaways:

• The IRS Annual Gift Tax Exemption has no bearing on Medicaid eligibility. A tax-free gift can still trigger a Medicaid transfer penalty.
• Indiana reviews transfers made during the 60 months (5 years) before an application for Medicaid services is filed.
• The Medicaid transfer penalty does not start on the date of the gift. Instead, it starts on the date the applicant would otherwise begin receiving Medicaid-covered care.
• Narrow exceptions exist for transfers to a spouse, a blind or disabled child of any age, and an adult child who lived in the parent’s home for at least two years and provided care that delayed a nursing home admission.

The Gift Tax Exclusion Does Not Protect You From a Medicaid Penalty

If you are wondering, “can you gift money before applying for Medicaid?” it’s important to be aware that the gift tax exclusion does not protect you from incurring a Medicaid penalty. The IRS Annual Gift Tax Exemption allows a taxpayer to make an unlimited number of tax-free gifts, up to a certain amount, every year. However, this exemption is part of the tax code and is unrelated to Medicaid eligibility rules. Staying under the Annual Gift Tax Exemption allows a taxpayer to avoid gift taxes, but it does nothing to help someone qualify for Medicaid.

Under 42 U.S.C. § 1396p(c)(1)(B)(i), any asset transfer for less than fair market value within 60 months (5 years) of Medicaid eligibility counts toward a Medicaid penalty. There is no exemption for small gifts. The lookback period was established under federal law and was extended from 36 months to 60 months as part of the Deficit Reduction Act of 2005. The goal is to identify assets that a person gave away that should have been used to pay for their own care.

How the Penalty Is Calculated, and When It Starts

To calculate the Medicaid transfer penalty, caseworkers determine the total value of gifted or under-valued transfers that occurred in the 60 months before a person applied to Medicaid to cover the cost of a nursing home or other long-term care. That total is divided by Indiana’s average monthly private-pay nursing home cost. The result is the number of months the person is ineligible for Medicaid.

For purposes of calculating the penalty, a “gift” is any transfer for which the person giving the asset did not receive something or equal value in return. Examples of gifts include:

• Sale of property for less than fair market value. The penalty is based on the difference between the property’s fair market value and the price actually paid.
• Vehicle title transfers for little or no compensation.
• Charitable donations that do not fit a longstanding pattern of giving established before a health decline.
• Adding a signer to a bank account who then withdraws funds.
• Life estate deeds that transfer a home while the giver retains the right to live there. The gift amount is typically calculated as the home’s actual value minus the actuarial value of the retained life estate, using IRS life expectancy tables and the owner’s age at the time of transfer.

There is a key difference between gifting and spending down. Paying for things a person actually needs, like home modifications, medical equipment, prepaid funeral arrangements, or hiring an elder care attorney, are examples of spending down that do not trigger a Medicaid penalty.

What Transfers Are Exempt From the Medicaid Penalty?

When considering if you can gift money before applying for Medicaid, it’s essential to be aware that certain transfers are exempt from the Medicaid penalty. They include the following:

• Transfers to a spouse in any amount.
• Transfers to a blind or permanently disabled child of any age.
• Transfer of a home to a spouse, a minor, a blind or disabled child, a sibling co-owner who lived there at least two years before the application, or an adult caregiver who lived there at least two years and provided care that delayed a nursing home admission.
• Genuine sales for fair market value, which are not gifts.

These exemptions are narrow and fact-specific, and typically require documentation.

Contact an Experienced Elder Law and Medicaid Planning Attorney Before You Gift Anything

A tax-free gift under the IRS Annual Gift Tax Exemption can cost a family months of Medicaid ineligibility. For individuals and families considering a gift, timing and documentation are critical. The elder law and Medicaid planning attorney team at Moore Law, LLC, can evaluate your situation and help you qualify for Medicaid while protecting your assets and ensuring your family is financially secure. We work with clients to gather and evaluate asset information, identify applicable Medicaid rules, and develop a plan to ensure you maintain your standard of living while qualifying for Medicaid.

Moore Law, LLC, is located in Batesville and proudly serves clients throughout southeastern Indiana and the rest of the state. Contact our experienced probate and estate planning team today to schedule an appointment to discuss your situation and learn more about whether you can gift money before applying for Medicaid.