All gifts within five years of applying for Medicaid benefits are potentially disqualifying. The yearly gift-tax exemption has nothing to do with the Medicaid rules and does not apply in that context.
The penalty for making gifts within the five-year look-back period is a disqualification for benefits from the time of application, based on the amount given away and the average cost of nursing home care at that time. There is approximately one month of disqualification for each $8,500 given away. There are some exceptions to the general rule.
You should consult an experienced Elder Law Attorney to ensure that your mother follows the best course of action for her and for her family.
As Attorney Adamsky noted, there is a penalty for making any gifts if your mother needs to apply for MassHealth to pay for long-term care in the next five years. There are also potential income tax consequences for dissolving the IRA which have nothing to do with the gift tax (and your mother's estate may be small enough that gift taxation is not an issue for her).
A good elder law attorney also will look at that trust to see if it provides any protection from MassHealth claims. A trust has to pass various tests to give any such protection.
The sooner your mother sees an elder law attorney, the better.
E. Alexandra "Sasha" Golden is a Massachusetts lawyer. All answers are based on Massachusetts law. All answers are for educational purposes and no attorney-client relationship is formed by providing an answer to a question.
Your mom is like many of my clients – a well-intentioned lady. However, a gift of up to $13,000 per person which is perfectly legitimate under tax law will be seen as a disqualifying transfer under Medicaid regulations.
You don't say if her assets are sufficient to private-pay for 5 years. If your mom is a Massachusetts resident, a transfer within 5 years prior to a Medicaid application would be subject to review and the transfer rules. She would have to run down her assets to $2,000, and then the Massachusetts Division of Medical assistance would calculate a penalty period FORWARD from the date she had already spent down.
The result would be that she would have no assets to pay during the penalty period. So if your mom is contemplating a need for Medicaid in the near future, she needs to have an elder law attorney review her particular situation and advise.
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Just by way of explanation, the rules about whether a gift is countable for Federal Gift and Estate Tax purposes are in an entirely different sphere from those regulating what assets are counted when applying for Medicaid/MassHealth. If you gave it away within sixty months of filing the application, it counts against your ability to receive benefits, essentially pushing you back 1 day for every $275 given away. Medicaid will review your mother's bank and investment statements when the application is filed to ensure that any depletion of assets (called a "spend-down") was an ordinary or specifically permitted expense.
I would encourage you to contact a local elder law/Medicaid attorney for the best strategy for getting her to qualify for Medicaid, and also to look at the personal residence trust so you can find out what the Medicaid rules say about that as well. As the attorney's fees are a permitted spend-down and you want her in the nursing home, you really have no reason not to.
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If she uses Medicaid for a nursing home, within 5 years, she will be penalized. The penalty is that she will be ineligible for Medicaid for a number of months (I cannot say how many as that is regionally determined).
I would advise consulting with a local elder law attorney.
Like several of my colleagues, I would suggest that your mother consult an elder law attorney. The benefits of doing so include: getting a clearer understanding of the risks and rewards of giving; exploring alternative strategies to reach the goal she has in mind; and having the trust reviewed by an expert in this area.
A good elder law attorney will work with your mother to understand her exact situation and goals. It could be that an alternative strategy, such a properly documented loan, could achieve the goal she has in mind. (A loan would have to be paid back, of course; otherwise, it could be regarded as a gift.)