Medicaid and Gifts

Medicaid in New Jersey

Medicaid will not pay for long term or home and community based care during a Medicaid penalty period. A penalty period will generally be imposed where uncompensated gifts have been made during the five years immediately preceding the filing of the Medicaid application. This period is known as the Medicaid lookback.  The length of the penalty period is computed based on the total amount of gifts during the look back period. Under the current Medicaid divisor, approximately one month of ineligibility is imposed for every $10,000 given away during the lookback period.

Many applicants are unaware that there is a rule, which applies to Medicaid applications filed in New Jersey after May 26, 2010, as well as to Medicaid applications filed in other states, including Ohio, preventing recalculation of the penalty period where some, but not all of the gifts made during the lookback period, were returned. The rule, as stated in New Jersey, is found in Medicaid Communication 10-06 and requires that the penalty period cannot be decreased for the returned gifts unless all of the assets given away have been returned.  This rule can have very harsh consequences, which are illustrated in a recent case from Ohio.

In Paczko v. Ohio Dept. of Job & Family Servs., (2017 OH 9024 (Oh. Ct. App., 8th Dist., Cuyahoga County, No. 105783, Dec. 14, 2017), an elderly woman transferred the sum of $146,122 to a trust, which would benefit her children. She later applied for Medicaid during the five year lookback period. The sum of $89,227.38 was returned from the trust to the elderly woman to pay for her care. She sought to reduce the original Medicaid penalty period computed on the total transfers during the preceding five years, by the sum of the returned gifts.  At the Board level, the Ohio Medicaid agency gave her limited for her returns, and denied her request for additional credit for all of the gifts returned. Her appeal was denied at both the Staff Hearing Officer and Court of Common Pleas levels.

While the Paczko case is not binding on the New Jersey courts, the case is a good illustration of what can happen when there is a partial return of gifts without further planning and a Medicaid application is filed within the five year lookback period. The take away from Paczko is that, in New Jersey, as in Ohio, applicants for Medicaid re well-advised to be mindful of the “no credit for partial returns” rule and to consult an attorney before filing any Medicaid application, or proceeding to a Medicaid Fair Hearing, to determine what solutions may be available.

Questions? Let Jane know.

Gifts and Medicaid: Gifting to Children and Grandchildren

Gifts and Medicaid in New Jersey

Clients often ask me, can they make gifts to their children and grandchildren without a problem concerning Medicaid?  Often, what they have in mind is the $15,000 annual exclusion, which is a federal provision, not a Medicaid regulation. The $15,000 annual exclusion permits a taxpayer to give up to $15,000 away per year without being required to file a gift tax return. Married couples may split gifts and currently give up to $30,000 per person per year if they both agree.

But the federal tax rules and the Medicaid rules are “apples and oranges” in this case. Different rules apply here for Medicaid than for tax purposes. While a gift of less than $15,000 would not require a federal gift tax return, even small gifts, payments of medical and educational expenses of others, and gifts to children and grandchildren and others, of any amount, can jeopardize Medicaid coverage for long-term care for New Jersey residents.  This is because of the rules which apply during the five year Medicaid look back period. If there are any gifts made by the Medicaid applicant within the five years immediately preceding the filing of the applicant’s first Medicaid application, all of the gifts made during that five year period will be totaled and a Medicaid penalty period corresponding to the value of the total gifts will be imposed. Due to the Medicaid penalty period, Medicaid will generally deny coverage for long-term care, for a period of time corresponding to the total amount of all of the gifts made during the five years immediately prior to the filing of the Medicaid application.  Under the current New Jersey policy, even if some of the gifts are returned, the total amount of all of the gifts made during the lookback period can be subject to a Medicaid penalty period. This can have disastrous results on a Medicaid application.

For example, assume that Billy and Sue are husband and wife and they together make $92,000 in gifts to their children between February 1, 2012 and January 31, 2017. If a Medicaid application was filed for Billy in the month of February, 2017, even if $90,000 of the gifts are returned by the children back to Billy and Sue, a Medicaid penalty in the sum of $92,000 can be imposed on Billy and Sue because that was the amount of the total gifts made during the five year Medicaid look back period for Billy.

Fortunately, there are sometimes strategies available to push back against this very harsh result.  When filing any Medicaid application in New Jersey, consulting with an experienced elder law attorney is advised.

Questions? Let Jane know.

Estate Planning Check Up and the New Tax Laws

Estate planning tax reform

The Tax Cuts and Jobs Act of 2017 enacted the most sweeping changes to the federal tax code since 1986. Many people assume that due to the increase in the basic exclusion amount (BEA) to $11,180,000 per individual, only the wealthiest need now estate planning. That is just not true!

Certainly, many fewer federal estate tax returns will be required to be filed. However, it is still important to periodically review your documents and your estate plan.  Most clients should review their existing wills and trusts. Particularly where a formula bequest was incorporated, the estate plan must be reviewed to ensure consistency with the client’s legacy goals.  This is due to the increase of the BEA.  The BEA functions like a sponge to limit or prevent a decedent from any federal estate tax liability at death. The BEA soaks up the decedent’s aggregated lifetime gifts and the assets remaining in the decedent’s estate at the moment of death, allowing the donor’s wealth up to the BEA limit to be transferred free of federal estate and gift taxes. Beyond the BEA, the estate will incur federal estate transfer tax liability. When the BEA was significantly lower, it was very common for estate planners to draft formula bequests, which allocated all of the decedent’s assets up to the decedent’s basic exclusion amount, to a “credit shelter trust” for the benefit of the surviving spouse and/or the descendants of the decedent. The remaining assets would pass outright to or in trust for the surviving spouse. With the doubling of the BEA and with credit shelter trusts which do not name the surviving spouse as a trust beneficiary, those estate plans will now disinherit the surviving spouse, and the surviving spouse will then be entitled to a one-third elective share of the decedent’s augmented estate in New Jersey.  The solution is to update the estate planning now, possibly with a disclaimer formula.  The new law sunsets on December 31, 2025.

At least until the new law sunsets, under the current regime, family limited partnerships remain a viable planning strategy, with the possibility of discounts for lack of marketability and lack of control. Trusts will continue to be useful for non-tax reasons, including privacy by avoiding the probate process, creditor protection, curbing spendthrift children, centralizing asset management, fostering family harmony through controlled asset disposition, and preserving a fund for a special needs beneficiary while protecting the beneficiary’s Medicaid and SSI eligibility.

Questions? Let Jane know.