Give It Away. December 2018.
By Timothy S. Barkley, Sr.
Mom and Susan flanked the lawyer, who addressed Mom: “If I recall correctly, Susan and I had discussed making sure you qualify for Medicaid by giving some of your investment real estate to the kids. Is that what you want to talk about?”
Susan assented, “Mom and I talked, and she agreed that the nursing home shouldn’t have everything. She said she and Dad had worked hard to get what they have, and she wants it to go to us kids.”
The lawyer looked at Mom, who also nodded.
“I just want to be sure we’re all on the same page,” said the attorney. “If you go into a nursing home, the bill has to be paid. Around here, it’s anywhere from six to ten thousand dollars per month. ‘Assisted living’ is on the low end; full nursing home care is on the higher end.
“Susan said your income right now from rental properties and Social Security is about $4,500 per month, you bring in another $500-$1,000 in dividends and interest, and that if you rented your house, you could bring it all up to about $6,500 per month. Is that about right?”
Mom looked at Susan, who nodded.
The attorney continued, “That means that you can pay the cost of assisted living out of income, pretty much. There are other costs that might need to be paid, such as consumable supplies, but the bulk of the cost can come from your monthly cash flow.”
Susan interjected, “What if she has to go to a nursing home and not just assisted living? What if the cost of care goes up more than rents and her other income? She could have to spend down savings and sell investment properties to pay for the cost of care.”
The lawyer nodded. “One of the ways to pay for nursing home care is to make sure you qualify for Medicaid. Medicaid is a medical welfare program that pays for nursing home costs for the poor.
“Medicaid isn’t about the government paying for nursing home care so you can make your kids rich. You can’t get Medicaid if you have made large gifts to qualify for Medicaid. When you apply, you have to list any gifts over $500 made within the past five years.
“The rule is that gifts create a period of disqualification from Medicaid. The length of disqualification is computed by a fraction. The numerator is the amount of all gifts for the five years prior to the date of application. The denominator is the imputed monthly cost of care, currently just under $8,000.
“So, if you gave away a $160,000 rental house to your children in the five years before application, you would be disqualified from Medicaid for 20 months, starting on the date you would otherwise qualify for Medicaid but for the gift. The disqualification is prospective – it measures forward from the date of qualification but for the gift, not from the date of the gift.
“The disqualification can be undone if the gift is given back. One of my clients gave their house to their kids, but when the parents had to apply for Medicaid, the kids gave the house back. The parents couldn’t apply until the house was sold and the proceeds spent on the cost of care, but there was no disqualification.”
Mom, who had been apparently disinterested, had actually been following the discussion closely: “What happens if the kids sell the house and spend the money?”
“That can be the worst of all worlds,” responded the attorney. “Let’s say you have good kids who would never sell the house voluntarily, but one of them loses a job and can’t pay bills, or gets divorced. The creditors or the ex-spouse can try to force the sale of the house so they can get paid. Then the kids can’t give the house back, but you’re still disqualified.”
“I can see how the kids might like this,” continued Mom, “and I’d rather have the kids have our money than the nursing home, but it sounds risky.”
“It can be,” agreed the lawyer. “It’s up to you. And if you don’t need Medicaid for five years, either because you stay healthy or because you have five years worth of other money, then under current law, the gifts would never show up on the application. Of course, the law can change and that five year lookback period could get longer – it used to be three years – but under current law, after five years you’d be free to apply for Medicaid.
“Another thing to think about is taxes. If you give appreciated real estate to the kids, their capital gains tax might be higher if they sold the property later, than if it went to them through your estate. That’s because the tax basis from which capital gains is computed stays the same – usually low – if you give it away during life, but adjusts to the fair market value on date of death. Usually it increases appreciably, so the sale produces less gain. Holding it to your date of death can save taxes.
“Of course, if it would all be spent on nursing home costs, that’s an academic issue, but it’s important not to try to save on the nursing home and spend extra on taxes.”
Mom nodded, and prepared to rise from the table. “I’ll think about it and talk to the kids. I need to figure out what’s best.”
“It’s your decision,” agreed the lawyer. “Let me know what you think is best for you and your family.”
Attorney Tim Barkley
The Tim Barkley Law Offices
One Park Avenue
P.O. Box 1136
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