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January 5, 2005
TO GIVE, OR NOT TO GIVE
That is the question many seniors are asking. In the past many seniors made annual gifts to their children and that has been fine. Assuming that the federal budget passes the U. S. House this week, the ability for seniors to make gifts will be severely curtailed because if they need nursing home care within 5 years of having made the gift, the gift will need to be returned and paid over to the nursing home.
It is anticipated that either late in January, 2006, or early in February the U.S. House of Representatives will return to Washington and make what should be the final vote on the budget. The House has already approved this budget once, but a slight variation was included in the Senate’s version of the bill, so it has to return to the House for a final vote. The Senate vote was tied 50-50 and Vice President Cheney made the deciding vote.
Seniors who have been thinking about protecting some of their assets are being advised to move ahead with their plans to avoid the draconian gifting rules that will apply once this new budget is passed. This means transfers need to be made within the next month to fall under out more favorable gifting rules.
The vote was 212-206 the last time the House voted on this budget. Six Democrats were absent from the first vote and it is anticipated that they will vote against the budget. This would make a tie vote unless AARP and abut 30 other senior organizations have their way. AARP has been informing the public of these devastating cuts and I’m sure that many members of the House are starting to feel some pressure.
This budget includes budget cuts of $39.7 billion with $6.4 billion in Medicare cuts and $4.8 billion from Medicaid. It was just over a month ago when these same legislators gave the rich a tax cut of $60 billion. And it is the same legislators that are scheduled to vote to repeal the estate tax, a tax that only the super-rich have to pay. Here is an explanation of the proposed change;
There are two main parts of the proposed change. The first is the extension of the look-back period from 3 years to 5 years. This means that now, MassHealth will look at your last 5 years of bank statements and add up all the large withdrawals from your account. These will be treated as gifts unless you can prove that they were not. Currently they are limited to looking at the last 3 years of bank statements.
The second part of the proposed change is difficult to understand and explain. I’ll do my best. Under our current Medicaid system, any gifts made within the look-back period have a certain amount of disqualification time associated with it. The new proposed law has a similar provision. The difference between them is that under the current law, whenever you make a gift, the associated penalty period starts at the time of the gift. The new proposed law delays the start date of the disqualification period of the gift until you are in a nursing home and are otherwise financially eligible. Effectively, this means that the gifts must be returned and paid over to the nursing home.
THE PROBLEM: The problem for seniors arises if they need nursing home care within 5 years of having made a gift. The only way to be safe is to make sure you make all of your gifts more than 5 years prior to needing nursing home care. Now, because no one knows 5 years ahead of time whether they will need nursing home care, one simple answer is to stop making gifts. This means gifts to your family as well as charities. Under the Medicaid rules, it doesn’t make a difference whether the gifts were to your child, your church, or a hurricane relief fund.
Example: Let’s say that Bill and Betty have $300,000 in savings and a home worth $400,000. Each year they make a $10,000 gift to each of their 4 children. They also give their church $1,000 per year. Bill has a stroke and needs nursing home care. What happens?
Under our current Medicaid system: Under our current rules, each time Bill & Betty make a total of $40,000 in gifts to their children, they are disqualified from Medicaid for about 6 months. The disqualification period starts on the date of the gift and ends 6 months later. So, as long as the last gift that they made occurred over 6 months prior to Bill needing nursing home care, the gifts would not affect his eligibility to get on MassHealth (Medicaid). The $1,000 gift to the church would have a 4-day disqualification period.
Under the proposed Medicaid system: Because under the proposed new rules the disqualification period will not begin until Bill is in the nursing home, we need to add up the gifts made within the last 5 years. Bill and Betty have made a total of $205,000 in gifts over the last 5 years. $40,000 each year to the kids and a total of $5,000 to the church has been made over the past 5 years.
Bill is not eligible for MassHealth because of the gifts. The total of $205,000 in gifts will cause a disqualification period of about 30 months, meaning that Betty will have to pay for his care privately for the next 30 months. Currently nursing homes charge about $300 per day. This means that Betty will have to pay for the next 30 months or about $270,000. That will leave her broke! If the church and the children were able to return the gifts to Betty, Bill would be able to get onto MassHealth with some additional planning. But let’s be realistic, the odds are that the children have spent the money and it would be difficult to get the church to return the gifts that have been made.
This new proposed law is so bad, I can’t even begin to explain all of the ramifications it has for seniors. Most, if not all seniors do not understand that by making gifts to charities and their family they are jeopardizing their ability to get on MassHealth in the event that they ever need nursing home care. Let’s hope that the U.S. House sees the problems with this law and decides not to pass it. I’ll let you know what they do in next week’s column.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org