Will Making a Gift Conflict with Medicaid?

People usually make gifts for three reasons—because they want to provide for the recipient, because they want to protect assets, or minimize tax liability. However, gifting in one’s elder years can have expensive and unintended consequences, as reported in the article “IRS standards for gifting differ from Medicaid” from The News-Enterprise, especially with Medicaid.

As a quick aside, if you’ve read any of my articles on gifting, you know I preach caution.  Way too many people make gifts because of a perceived benefit, and don’t consult a professional to determine whether there is a benefit.  That said, for the purposes of this article, I’m going to focus on Medicaid gift tax consequences as opposed to all of the other pros and cons in making gifts.

A primary reason for most people to make gifts is tax planning.  The IRS gift tax becomes expensive, if gifts are large. However, each individual has a lifetime gift exemption and, as of this writing, it is $12.06 million, which is historically high. A married couple may make a gift of $24.12 million. Most people don’t get anywhere near these levels. Those who do are advised to do estate and tax planning to protect their assets.

The IRS also allows an annual exemption. For 2022, the annual exemption is $16,000 per person. Anyone can gift up to $16,000 per person and to multiple people, without reducing their lifetime exemption.

However, the more real danger is the effect of a gift on Medicaid or long-term care benefits.  People, and frequently financial advisors and non-attorney professionals, often confuse the IRS annual exclusion with Medicaid requirements for eligibility. IRS gift tax rules are totally different from Medicaid rules.

Medicaid does not offer an annual gift exclusion. Medicaid penalizes any gift made within 60 months before applying to Medicaid, unless there has been a specific exception.  The Veterans Administration may also penalize gifts made within 36 months before applying for certain VA programs based on eligibility.

For Medicaid purposes, gifts include outright gifts to individuals, selling property for less than fair market value, transferring assets to an irrevocable trust, or giving away partial interests.  Some gifts are expressly permitted, such as gifts between spouses.  Also, most states have some species of an exception for very small gifts, but that definition varies widely.

For example, in Texas there is no exception for small gifts.  However, Medicaid staff is instructed not to inquire into potential gift transactions for less than $200 total in a month.  That doesn’t create a strategy of gifting typically, but it avoids Medicaid penalties when Grandma gives $50 to a grandchild for their birthday.

The penalty for gifting in Medicaid is a penalty period.  In short, Medicaid looks at your eligibility, and once otherwise eligible will calculate a penalty period by dividing the value of your gifts by a penalty rate based upon the daily average cost of a nursing home in the year of the gift.  So, if you gave away $50,000 and the penalty rate is $250 per day, you are ineligible for 200 days.  During this time you’ll have to find a way to pay yourself before Medicaid will.

So, gifting where Medicaid may be an issue in the future often has very real and dangerous consequences.  That doesn’t mean gifting can’t be useful in Medicaid, as sometimes gifting is an express strategy for eligibility, but anyone making gifts should do so at the advice of an attorney.

Reference: The News-Enterprise (Aug. 6, 2022) “IRS standards for gifting differ from Medicaid”

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Benefits of Life Insurance in Estate Planning

I’ve had a lot of conversations recently with clients about life insurance in their estate plans.  As an estate planner, I like life insurance.  It provides many benefits in estate planning that are worth considering.  So, I wanted to address some benefits of life insurance.

I’m not doing to talk about whether you should get it per se (other advisors are better suited for that and we can recommend excellent ones), and I’m not going to talk about the financial pros and cons, but instead will focus on the role of life insurance in an estate plan and administration.  For more on how insurance works and the pros and cons, you may want to read Bankrate’s recent article entitled “Life insurance for parents” which exams how life insurance can help your family.

Liquidity:Sometimes clients will ask for very detailed estate plans involving several bequests.  The estate plan is truly their legacy, and they want to express their love and appreciation to many people by giving them a gift in their estate planning.  I think that’s wonderful, but it does present a problem if the estate is illiquid.

For example, a client may have a very healthy estate of $3,500,000 and want to leave $100,000 a piece to 7 different relatives.  That’s fine in theory, but where do you get $700,000 in cash?  That client might have a house, a vacation/beach home, retirement and minimal bank accounts.  The 401(k) might have to (or tax wise should) go to his spouse.  If the house is worth $750,000, the beach home $250,000 and the retirement $2,000,000, you don’t have enough cash left over to give $700,000 to the family, unless you start selling.  With life insurance, you have the cash available.

Estate Tax Planning.This is a bit more complicated, but for clients concerned about estate tax, life insurance is a very useful tool.

The first reason why is similar to the liquidity point.  If you know you are going to pay the estate tax, which is a 40% tax rate on the value of the estate which exceeds your exemption, you may have a rather large check to write.  So, having cash at death provides your beneficiaries with a way to pay the tax without having to liquidate assets at death.

Second, it has a low lifetime value, and most of the value comes post death.  So, if you want to leave more money to your beneficiaries while keeping a smaller amount of assets during your lifetime, you may consider using life insurance in an irrevocable trust.  Here is a useful article talking about how life insurance trusts work.

https://galligan-law.com/the-irrevocable-life-insurance-trust-why-should-you-have-one/

Providing for Beneficiaries with Disabilities: Life insurance is a great income replacement tool, which the Bankrate’s article addresses.  In this particular estate planning context, it is an extremely useful tool for planning for beneficiaries with disabilities.  For example, many couples who have a child with disabilities will provide for that child for as long as they are able.  Their lifetime support provides benefits, both tangible and intangible, for their child that government benefits can’t address.  However, that support may go away when you pass.

Now, that situation is often best addressed by leaving assets to that child in a supplement needs trust, but more importantly, the assets you leave have to be liquid as you know they will be used liberally for the care of your loved one.  So, creating a trust to hold the insurance, such as an inexpensive second-to-die policy, allows the cash to be held in a tax and benefits-efficient manner for your loved one.

Simplicity.Life insurance, in its simplest form, is a contract for a company to give cash to a person you named when you die.  That money is income tax free and doesn’t have complicated rules about how to distribute the proceeds.  For comparison, retirement assets like IRA’s and other qualified retirement funds have complicated rules about to whom they pay out, how long those beneficiaries have to take the money and very specific steps to follow to obtain them.  Retirement assets are wonderful of course because tax deferral allows retirement assets to grow tremendously and provide for your retirement, but are taxed to beneficiaries and don’t flow through your estate plan as easily as life insurance proceeds.

Creditor Protection:  This is not true everywhere, but in Texas life insurance has creditor protection.  So, there are situations where an estate or a beneficiary has creditors, but life insurance can be shielded.  You don’t want to rely on that alone for asset protection planning, but is a helpful feature that cash in a bank account lacks.

If you have life insurance and want to discuss its role in your estate plan, please reach out to your estate planning attorney to learn how it can help you.

Reference: Bankrate (July 26, 2022) “Life insurance for parents”

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What’s the Difference between a Living Will and a DNR?

Clients occasionally ask about “DNRs” and whether we prepared them as part of the estate plan during our consultations.  We do not, but we do prepare living wills.[i] A living will and a Do Not Resuscitate Order, known as a DNR, are very different documents. However, many people confuse the two. They both address end of life issues and are used in different settings, according to the article “One Senior Place: Know the difference between ‘living will’ and ‘do not resuscitate’” from Florida Today.

As a quick aside, many states articulate medical decision making differently, and that comes out in estate planning.  For example, some states have advanced care directives with more exhaustive instructions, others are very simplistic.  For this blog’s purposes, I’m focusing on living will versus DNR.

What is a Living Will?

A living will is a statement describing a person’s wishes about receiving life-sustaining medical treatment in case of a terminal illness or irreversible if the condition is incurable. It is used when you can’t speak for yourself and gives guidance to a decision-maker who will act on your behalf.  This includes choices such as whether to continue the use of artificial respiration, feeding or hydration tubes or other artificial means to prolong life.

The living will is used to make your wishes clear to loved ones and to physicians. It is prepared by an estate planning or elder law attorney, often when having an estate plan created or updated. It will be used if and when the situation arises.

What is a DNR?

A DNR is a medical directive used to convey wishes to not be resuscitated in the event of respiratory or cardiac arrest. This document needs to be signed by both the patient and their physician. It’s often printed on brightly colored paper, so it can be easily found in an emergency.

To draw the distinction a little more clearly, the living will comes into play when the doctors have done what they can and nothing else is expected to help (the terminal condition) in which case your wishes are follow, and the DNR is a request not to try and resuscitate.  Most people if they are in my office want the living will, not the DNR.

The DNR should be placed in a location where it can be easily and quickly found. In nursing homes, this is typically at the head or foot of the bed. At home, it’s often posted on the refrigerator.  It is also often used in hospital settings.  The DNR needs to be immediately available to ensure that the patient’s last wishes are honored.

When the DNR is in effect and easily found, the emergency responders will not initiate CPR if they find the patient in cardiopulmonary arrest or respiratory arrest. They may instead provide comfort care, including administering oxygen and pain management.  To be clearer, a DNR doesn’t mean doctors won’t treat you, but it means they won’t resuscitate in the event of arrest.

If a person is admitted to the hospital, their living will is placed on the chart so that it can be followed appropriately. Once a clinical determination of a terminal and irreversible condition has been made, the terms of the living will are followed.

As one more final point, clients sometimes confuse the medical power of attorney and living will.  Mary did an excellent blog cover the basics of each, their differences, and why having both is beneficial. You can find that here:

https://galligan-law.com/living-wills-and-medical-powers-of-attorney-why-they-are-important/

Reference: Florida Today (July 19, 2022) “One Senior Place: Know the difference between ‘living will’ and ‘do not resuscitate’”

[i] In Texas, we use a “Directive to Physicians.”  This is largely analogous to living wills in other jurisdictions.  Since I’m writing online and to more than just a Texas audience, I’ll use the more generic term of living will.

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