A common misconception is that you can utilize the IRS’s gift tax exclusion allowing gifts up to $15,000 per year, per person without invoking Medicaid’s transfer penalty period. This simply is not true. The $15,000 per person per year is an annual gift tax exclusion governed by 26 U.S. Code § 2503, and is NOT an exclusion for transfers under Medicaid.
Under the new Deficit Reduction Act of 2005 (“DRA”) rules, a person who is otherwise eligible for Medicaid will be subject to a transfer penalty period based upon transfers made for less than fair market value. As of 2018, the Medicaid agency will look back through the last 5 years for asset based transfers. The DRA increased the look back period for transfers on non-trust assets from 3 to 5 years, for transfers made on or after February 8, 2006. Therefore, any transfers made prior to February 8, 2006 will be governed under pre DRA rules.
For example, let us assume a person made transfers of $15,000 to each of his three grandchildren last year, for a total annual gift of $45,000. He would be penalized by the Medicaid agency in the following manner. First Medicaid determines the regional rate that he would pay privately for Nursing Home services. In Suffolk County that regional rate is slightly over $13,000. The regional rate can be less than what he might privately pay for services, but often times it is much more. Regardless, the regional rate according to Medicaid is a constant. Second the Medicaid agency will calculate the total gifts made and divide that number by the regional rate of $13,000. The quotient of that expression represents the amount of months Medicaid will penalize the applicant. The penalty can be harsh, because the applicant has to privately pay the Nursing Home for the length of the penalty period. Once the penalty period expires, the applicant is free to re-file for Medicaid benefits. In the example the penalty would be $45,000 divided by $13,000 to get 3.46 months of penalty time from the date the Medicaid application was filed (not from the date of the transfer).
Therefore annual gifts of $15,000 or less may not be a good component to your long term health care plan if you wish to rely on Medicaid to pay your nursing home bills.