What are the estate planning implications of gifting property or money to your heirs? I often get this question during the seminars I give regarding estate planning and Medicaid eligibility. People want to know what happens if I give my heirs some money now? How does that effect my estate? How is it taxed? And is it a good idea? And what is the origin of that silly phrase “Don't look a gift horse in the mouth”?
Addressing this last point first, since a horse's gums recede as it gets older revealing more of its teeth, one would check the horse's teeth to determine the horse's age. And if that horse was given as a gift, checking its age by looking in its mouth might seem an ungrateful or unappreciative gesture. Thus, when given a gift it is wise not to seem ungrateful or unappreciative less you be accused of “looking a gift horse in the mouth.”
An article by Paula Pant on lone of my favorite websites,The Motley Fool, summarizes the advantages and disadvantages of gifting quite nicely. There are tradeoffs regarding taxes, seeing how the gift is used, discontinuing the gift or changing your mind about gifting itself. In summary, Pant suggests that if you are financially secure and know that your long term health care is manageable, then gifting now seems appropriate. But if its a close call that you must consider your own financial needs later in life and you are best to hold onto the money for the time being just in case.
I would add that there is a very real additional issue that one must consider regarding gifting and that is Medicaid eligibility. Unless you have all the money you foresee needing or have a very extensive long term health care policy, at some point in your late life you, or your loved ones, will have to consider applying for Medicaid coverage in order to pay for a nursing home or in some cases assist living or home health care. If you foresee that possibility, understand that Medicaid looks back over the last five years to see if you have made any gifts of your assets and may penalize you by delaying your eligibility as a result.
Medicaid requires that the applicant only have a minimal amount of assets in order to qualify for eligibility. Currently in Maryland that amount is $2,500. Some think that they can just give away their assets in order to get under the $2,500 limit. But Medicaid doesn't want you to give everything away on Monday and apply for Medicaid on Tuesday. Instead, they look back over the past five years to see what, if anything, you have given away for less than fair market value. So a direct transfer of cash would be considered a gift by Medicaid. And if you gave away your car that too would be considered a gift. Medicaid would then take the value of that gift and divide it by a prescribed value which is currently $6,800 to determine the number of months you would be penalized and therefore not eligible to apply for Medicaid – meaning you would have to pay the nursing home bill yourself. So for instance, let's say that you wanted to make a gift to your children of the last $34,000 in your account in order to get under the $2,500 Medicaid eligibility limit. Medicaid would divide the $34,000 by $6,800 resulting in a five (5) month penalty period during which you would be ineligible to apply for Medicaid and would have to pay your nursing home bill yourself. Now if you made that gift more than five years prior to applying for Medicaid, then they don't care and there is no penalty period.
So in addition to the considerations that Paula Pant discusses, I would add that you must carefully consider your long term health care needs prior to making any gifts of cash or property to your heirs. For this and many other reasons, you should consult with an estate planning attorney who has specific knowledge and understanding of the Medicaid eligibility requirements before gifting. Doing so would not be “looking a gift horse in the mouth”.