Misunderstanding Gifting Rules

Those who do not deal with tax laws and Medicaid rules on a regular basis usually have a misunderstanding on gifting rules, because the tax laws and Medicaid rules are totally different. Gift tax laws as of 2022 state that gifts up to $16,000 per person per year do not count as a taxable gift. If a parent gives $17,000 in one year to a child, the gift has exceeded the $16,000 limit by $1,000, and in theory, the $1000 is countable as a gift. But the gift and inheritance tax law Connecticut has an overall $7.1 million lifetime exception. That means the excess gift of $1,000 will be subtracted from the persons $7.1 million lifetime exemption and should bring a smile to almost everyone reading this, because very few people gave more than $7.1 million in assets. In short, there is no tax on that gift unless the total of countable lifetime gifts and transfers after death exceed $7.1 million.

The Medicaid rules, however, are drastically different. No matter how big or small a gift, it counts as an impermissible transfer if done within five years of applying for Medicaid. Now, the state will not penalize small birthday or Christmas gifts, but in general for Medicaid it does not matter if the gift is $1,000 or $15,000 or any other amount, because a gift within five years of applying for Medicaid will cause the State of Connecticut Department of Social Services to assess a penalty period where Medicaid will not pay for services. It works like this. For every $13,863 dollars gifted, a one month penalty period is imposed. It does not matter that the gift is not taxable. All that matters that it is a gift because the state quite logically says you can’t give away money and then ask the state to pay for your care because you
have no money.

There are, however, many transfers of assets to children, or others, that may not be counted as gifts by Medicaid. For example, any amount of money can be gifted to a child who is considered disabled under the social security rules. That child can be a minor or a fully grown adult. Also, any and all assets can be transferred to a spouse and that will not cause a penalty. Medicaid allows siblings who live together for at least one year in a house that both own, to transfer the ownership of the house to the healthy one if the other one needs a nursing home or in home care. There are other exceptions to the Medicaid gifting rules which may apply to some families. For example, if a child lives with a parent for two years, and gives care to that parent that was necessary to keep the parent out of a nursing home, the rules allow
the parent to transfer the house to the child and still qualify for Medicaid. That is called the Caretaker Child Rule.

A variation on that rule is not limited to a child giving care and applies to anyone who lives with the sick person for two years or longer and gives the care without which the sick person would have been institutionalized. The rule allows the transfer of assets at the current rate of $13,863 per month. Twenty four months times $13,863 per months is $332,712. That’s a significant sum. And there will not be any gift tax on that to the giver or the recipient.

In summary, few people have to worry about gift or inheritance taxes, but almost everyone should know how gifting could adversely affect them if they are of the age where health concerns may require long term care within five years of gifting.