When Gifting Backfires: Understanding the Risks of Asset Transfers When Planning for Long-Term Care

When preparing for the costs of long-term care, whether assisted living or nursing home care, many well-meaning individuals make financial decisions they believe will protect their legacy or qualify them for government benefits. Unfortunately, without a clear understanding of Medicaid rules, these decisions can have serious unintended consequences. 

In this week’s episode of the Elder Law Report podcast, attorneys Greg McIntyre and Brenton Begley break down the complex relationship between gifting, Medicaid qualification, and asset protection. Here’s what you need to know before transferring property or giving away money. 

Many people assume they can gift up to $17,000 or $18,000 per year per person (based on current IRS rules) without consequences. While that’s true for federal gift tax reporting purposes, it has no bearing on Medicaid rules. 

“Just because it complies with the federal gift tax exemption doesn’t mean it complies with Medicaid’s look-back period,” says Greg McIntyre.

Bottom line? What’s allowed for tax purposes may still trigger penalties under Medicaid if it reduces your countable assets within the five-year window. 

Gifting your house to your children might seem like a simple way to pass it on, but doing so can create a host of legal and financial problems. Begley outlines several:

• Look-back Violation: The value of the home becomes a penalty amount, delaying Medicaid eligibility. 
• IRS Reporting: Gifts of property above the annual exclusion require IRS reporting.
• Capital Gains Issues: If the recipient later sells the property, they could face steep capital gains taxes due to lack of “stepped-up basis.”

“You’re better off keeping the property in your name and using tools like a Lady Bird Deed,” advises McIntyre. “That way, you stay in control and avoid violating Medicaid rules.”