Wanting to share our good fortune with others is only natural. Perhaps it is even an obligation. However, sometimes generosity can interfere with our future well-being. If you think you might someday need outside help to pay for your long-term care, you need to be careful. This is because public benefit programs, such as Medicaid, can penalize many transactions that can lead to loss of long term care assistance. The following transactions should be made carefully, with an understanding of the consequences such transactions have on your future long term care assistance, before completing them.
Under federal Medicaid law, if you make gifts within five years before applying for Medicaid, you can lose Medicaid help for a period of time (called a transfer penalty). Any transfer that you make, however innocent, will come under scrutiny. For example, gifts for holidays, weddings, birthdays, and graduations can all cause a transfer penalty. If you buy something for a friend or relative, this could also result in a transfer penalty. Also, if you “sell” an asset to an individual for less than its fair market value, you could be subject to a transfer penalty.
Even small transfers can affect eligibility. While federal law allows individuals to gift up to $14,000 a year (in 2017) without having to pay a gift tax, Medicaid law still treats that gift as a transfer. Medicaid also does not have an exception for gifts to charities. So, if you give money to a charity, it could affect your Medicaid eligibility down the road.
It is common for individuals to want to help family and friends with obligations by loaning them funds. This may occur if a family member or friend is unable to obtain a loan from commercial sources or simply wants to give that person a better deal on interest or payment terms. However, federal Medicaid law imposes restrictions on loans. Unless the loan meets precise Medicaid requirements, it can be considered a transfer for less than fair market value. If Medicaid criteria is not met, the outstanding balance on the promissory note, loan, or mortgage will be considered a transfer and used to assess a Medicaid penalty period.
Annuities can be valuable retirement and longevity planning tools. Certain types of annuities can also be useful when planning for Medicaid benefits. However, an annuity that fails to meet precise Medicaid criteria can be considered a transfer for less than fair market value. In some instances, the entire purchase price of the annuity will be penalized even if it has paid a substantial portion back to the owner. If the annuity is irrevocable, it may also be impossible to “cure” any issues that create of barrier to Medicaid eligibility. An annuity can be a powerful financial planning and asset protection tool in the right circumstances. However, one should be well aware of the impact the annuity will have on Medicaid eligibility before purchasing it.
For those who cannot afford to pay for their own long-term care, a transaction entered into at the wrong time can result in loss of Medicaid and place the individual at risk of not receiving needed care in the future. Whether you are considering paying for a granddaughter’s senior year of college or loaning your son money to purchase a new home, you should consider contacting us if you are at risk of needing long term care in the five years after the transaction. We can assist you in weighing the costs of the transaction and can often help you in developing alternative strategies that meet your goals and minimize your risk.