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Doris from
Minnesota is considering transferring her assets to her son so they
won’t be lost to Medicaid should she need assisted-living or nursing
home care. Is that the right move? If so, what’s the best way to do
it? Read on to find out.
One of the
greatest financial risks seniors face is the rising cost of
healthcare, including the cost of custodial care in an
assisted-living facility or nursing home. And seniors are worried
about this. They’ve worked hard all their lives to build a nest egg
and they shudder at the thought of it being spent on their care
instead of going to their children.
Some would prefer
to have Medicaid (government welfare) pay their nursing home costs
so they can leave their assets to their heirs. Medicaid is the
government agency that pays nursing home costs for seniors.
To qualify, you
can only have $2,000 in assets other than your home. (Be warned, the
government has the right to sell your home when you die to recoup
the amount they spent on your care.) As a result, many seniors
consider gifting assets in an attempt to preserve them.
It is considered
fraud to hide assets or to lie to the government when applying for
Medicaid. I do not condone that in any way. Gifting, though, is a
viable, legal way to protect your estate, but there are certain
rules you must follow.
Most people think
you can only gift $11,000 per year to someone without having to pay
Federal gift taxes. Since Federal gift tax rates start at 41%, you
sure want to avoid them!
It will take Doris
over 10 years if she can only gift $11,000 per year of her estate.
But here’s the good news: you can gift over $11,000 each year
without having to pay Federal gift taxes! Each person has a lifetime
gift-tax credit that results in being able to gift $1,000,000
without any Federal gift taxes.
So Doris can gift
$100,000 to her son all at once. She just needs to tell the IRS to
consider the part over $11,000, or $89,000, as a part of her
$1,000,000 lifetime exemption. That’s done by filing Form 709 with
her taxes that year.
Notice I kept
referring to Federal gift taxes. You may still be subject to state
gift taxes. For instance, here in Tennessee, there is a 6% tax on
gifts over $10,000 per person per year and there isn’t any lifetime
exclusion. Be sure to investigate the laws in your state.
Just because Doris
gifts away all of her assets today, she can’t qualify for Medicaid
tomorrow. By law, Medicaid can investigate to see if you gifted away
any assets within the three years prior to your application. If so,
they will deny you benefits for the number of months those assets
would have paid for.
Let’s say Doris
applies for Medicaid within 3 years of gifting $100,000 to her son.
Assuming nursing home care in her area costs $3,000 per month,
Medicaid wouldn’t start paying those costs for 33 months! Medicaid
figures that the person the money was gifted to will feel obligated
to pay the costs until then. Still, it’s better for Doris to gift
as much as she can, as soon as she can, so the 3-year clock starts
ticking.
One concern Doris
has about gifting her assets to her son is that he could lose half
the amount if he gets divorced. She would like to prevent that if
possible. If she trusts her son and wants him to have control over
the money but also wants it protected from creditors, future estate
taxes and from loss in a divorce, then Doris can gift the assets to
a Beneficiary Trust instead.
You can find
additional information about Beneficiary Trusts at
www.guardingyourwealth.com. Beneficiary trusts are expensive to
set up and probably shouldn’t be used unless you want to protect
several hundreds of thousands of dollars in assets.
The bottom line is
that there are ways that you can gift large amounts without paying
federal gift taxes. This is a legal form of Medicaid planning. It
can also be used to reduce the size of taxable estates.
Have a financial
question? Send me an email and I’ll personally respond, free of
charge. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’.
In addition to being a nationally syndicated columnist and Certified
Financial Planning Practitioner, Mr. Voudrie provides personal,
private money management services to clients nationwide.
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