There are many potential complications when you consider gifting assets during life-especially if you need long-term care such as that offered by an Assisted Living Facility or Nursing Home. The first thing to consider is the amount of your assets and your goals in preserving them.
There is currently a $14,000 annual exclusion for gifts. This means that an individual can gift up to $14,000 per recipient per year, without triggering the requirement to file a federal gift tax return. Unless there is a possibility that you may transfer a combined amount during your life (at most $5,250,000 at death- the federal unified gift and estate tax exclusion amount), you need not be too concerned about federal estate and gift taxes under current legislation.
With transfers in excess of $5,340,000 in 2014 ($5,430,000 in 2015), we should shift our focus away from tax planning and toward a strategy for our long-term care as we age. The goal of healthcare planning is to protect assets in the event that an individual- or their spouse- needs assisted living or nursing home care.
There are three main sources of payment for long term care: long term care insurance; out-of-pocket, private funds (or “self-insured”); and Medicaid. Medicaid covers long-term care costs for those who meet specific financial and medical eligibility requirements. To qualify for Medicaid, an applicant’s income and assets must be within designated limits.
Under NJ Medicaid rules, if an individual transfers his/her assets to anyone (including gifts to children or transfers to a trust) that is less than fair market value within five years of applying for Medicaid, the transfer will trigger a Medicaid “penalty period.” This means that from the date of the Medicaid application until the end of the penalty period (depending on the value of the transfer), Medicaid will not pay for the applicant’s care, even if the applicant has insufficient assets and income to pay himself/herself. The five-year Medicaid look-back means that annual gifts could be disastrous if you (or your spouse) need Medicaid to pay for your long term care within five years of making such transfers.
It’s important to know that just because gifts are permitted under federal tax laws does not mean that they are safe under state and federal Medicaid rules and regulations. Not all transfers within the Medicaid look-back period interfere with Medicaid eligibility, however. In fact, there are several exemptions in the Medicaid rules that allow for certain transfers without penalty.
Documents such as Trusts, Life Estate Deeds and Powers of Appointment can help plan for long-term needs by preserving assets. It is important to note, however, that there is not a “one-size-fits-all” strategy. It all depends on many factors, including: the amount and type of your assets, the amounts and sources of your income, your age, your health and whether or not you are married, and other factors.