Inter-vivos Gifting: What Our Clients Need to Know

by Carolyn L. Kenton and Amy E. Dougherty
Middle-Class clients should consider gifting during their lifetime.

Inter vivos gifting should feature prominently in the estate plans for our middle class clients who may have accumulated considerable wealth. The old limits of gifting $10,000 (now $14,000) to each family member every year is not useful if the family’s goals are to transfer wealth without taxation and to protect assets from expenditure for nursing home expenses. Because of changes in the tax code, a person may gift $5.3 million in one transaction and still experience no federal gift tax liability. Kentucky has no gift tax. Middle-class folks won’t ever see the federal limit and should not think of gifting in terms of the annual gift limit. If a person is trying to preserve assets from nursing home expenditures, then large gifts that occur earlier than five years before a person’s need for nursing home assistance is the goal as such gifts will invoke no Medicaid penalty.

For clients who have done no planning, and now have a family member residing in a nursing home, inter vivos gifting can still be beneficial. Though the Medicaid rules impose a penalty on Medicaid ineligibility for a period of time based on the size of the gift for transfers that were made in the last five years, the family may still be able to retain up to half of the gift free of Medicaid’s reach.

Here is an example of how the process might work. Mom has not done appropriate estate planning and becomes ill and in need of nursing home care. She has too many assets to be eligible for Medicaid to pay her nursing home bill. She takes all of her liquid assets and gives them to her most responsible child. That child places all monies received from his/her mother into a segregated account in the child’s name.

As soon as mom would be eligible for Medicaid but for having made the gift, an application for Medicaid will be made. The application will be denied because of the gift but the goal is to establish the number of days that mom is ineligible because of having made the gift. (Monies in this account in most circumstances should be placed in a revocable living trust so that they will not become part of the child’s estate should he/she predecease mom.)

The child then returns to mom, one month at a time, from the segregated gift account, enough money to pay mom’s nursing home bill from the money that mom transferred to him/her. When approximately half of the gifted amount has been returned, a second Medicaid application is made.

Upon re-application, the Medicaid office reduces the size of the gift by the amount returned to mom and recalculates the period of time for ineligibility. Mom should then be eligible and approximately half of the gifted assets will have been preserve for other uses to benefit mom.

This process requires steady nerves and a good accounting system. It also is helpful to use the assistance of a professional with some experience in managing this gifting procedure and with knowledge of the ins and outs of the Medicaid office.

This article was published in Attorney at Law Magazine, click here. Contact our office for more information about how gifting can help you plan for the future.