Q. Prompted by the temporary increase in the gift tax exemption, my wife and I recently made gifts of $50,000 apiece to each of our 3 sons. Shortly thereafter my wife had a stroke and now needs full-time care in a nursing home. The cost is running about $7,500 per month and I need to apply for Medi-Cal to help. However, I heard something about a Medi-Cal “look back”, which might now prevent her from qualifying. Can you explain this?
A. Sure. Medi-Cal is the government program designed to help subsidize the cost of a nursing home for those individuals who meet the Medi-Cal resource limits. In 2012, if a married person needs a nursing home subsidy, the couple’s non-exempt resources cannot exceed $115,640. In an effort to qualify, some couples give away excess assets to their children. While perhaps O.K. for tax planning, such gifts transfers are not treated kindly by Medi-Cal. Indeed, Medi-Cal imposes a period of ineligibility, or penalty, linked to the value of any gift made within 30 months of application. This 30 month period is called the “look back”.
Currently, for each $6,840 of gifts made during that “look back”, an individual will lose 1 month of Medi-Cal eligibility. Thus, a gift of $50,000 would generate a 7.3 month penalty, which Medi-Cal now rounds down to 7 months.
Under current rules, the Medi-Cal gift penalty triggered by each of the 3 gifts to your sons would run concurrently. So, the ineligibility term would be 7 months, not 21 months. The month of the gift is the 1st penalty month. Example: if your gifts were made in November, 2011, the 7 month count-down would begin in November and run through May, 2012. During that 7 month period you would have no help from Medi-Cal. The penalty will expire on June 1, 2012, and will thereafter no longer interfere with her Medi-Cal application.
The gift penalty only affects gifts of cash or other non-exempt assets. Gifts of exempt assets, such as a home, can usually be made even during the “look back” without triggering a gift penalty. However, gifts of the home require special care so as to preserve associated tax benefits.
Caution: In the near future, because of a federal law called the Deficit Reduction Act, the Medi-Cal penalty rules will tighten up: the look-back will increase to 5 years; gifts to multiple recipients will trigger penalties which run consecutively; no more rounding down; and, the penalty will not even begin to run until the donor is in actual need of a subsidy, which could be up to 5 years down the road when he may have limited funds to pay for care, eliminating his access to a Medi-Cal “safety net” and placing him at risk.
In short, gifts made with only tax or probate-avoidance concerns in mind can have devastating consequences for a parent who later needs nursing care. To minimize these consequences, any planned gifts should be carefully structured so as to preserve the parent’s eligibility for a future Medi-Cal subsidy, if necessary. Currently, with proper planning, this can still be done: with special care even gifts of non-exempt assets can be made without generating a gift penalty, and gifts improvidently made can sometimes be “cured”. However, advance planning and professional guidance are the keys.