Specifically Designed Educations Gifts to Minors Avoid Medicaid Penalty

Dear Mr. Premack: My elderly parents, who have been living solely on Social Security payments, are about to get $500,000 in bonus from an oil and gas lease. I had always thought that Medicaid in the nursing home would be no problem for them because they had no assets but their home and no income but Social Security. What is the best way to plan for expenditure of this money? I want them to save it all for possible nursing home. They could each live another 5-10 years and at the cost of a nursing home the money would be used up. They want to give gifts to everyone and buy stuff. Since the look-back period is 5 years, is it correct that any gifts will be used against them? This influx of money to poor elderly people in South Texas is really causing concern! Thanks. – KLC

It is a fortunate event for your family and for the taxpayers that your parents will receive such a large sum of money. Sometimes care received under Medicaid can be inferior to that received under a private pay arrangement (though the law says they are to be of equal quality, it is not always so).

Clearly, after they receive the money they will no longer qualify for Medicaid due to excess resources. They are allowed to own their home, an automobile, personal effects and to have $2000. Any added assets will disqualify them from Medicaid.

Since you “want them to save it all for possible nursing home” expenses, they could do just that – preserve the funds in insured bank accounts, and use it for their personal needs and nursing expenses. If indeed they each outlive the funds, then they could again become qualified for Medicaid.

As to their desire to give gifts and to buy stuff: there is no restriction on what they can buy (in the sense of vacations, household goods, groceries, home repairs and upgrades, and other items which are of personal benefit to them). If they buy “investments” like real estate or stocks, those items are still countable resources.

On the other hand, gifting assets to others is penalized under the Medicaid transfer provisions unless 5 years pass from the date of the gift to the date they apply for Medicaid. There are a few minor exceptions to the gifting rule, but let’s focus on large exception that is relatively new: gifting money that is set aside for a grandchild’s education.

Under section F-6602 of the Medicaid Eligibility Handbook, a person may establish a Uniform Transfers to Minors account under Texas law, may gift money or other assets to the account, and may select the account’s custodian. No transfer penalty will be imposed because of the gift, so no disqualification from Medicaid will ensue.

The beneficiary must be under age 21 when the contribution is made. The custodian must use the UTMA funds to purchase a 529 plan or a Coverdell education fund (but the fund itself must be irrevocable, so the Texas Guaranteed Tuition Plan does not qualify at this time). The fund is then used to pay for educational expenses for the grandchild beneficiary. Distributions may be made for education both before and after the beneficiaries reach age 21.

Even though such a gift does not put them in jeopardy of a Medicaid transfer penalty, they must still remain aware of the IRS gift tax rules. Special IRS rules allow them to give to a 529 plan, in one lump sum, five times the annual exclusion without incurring gift tax. The annual exclusion is $13,000 – so they can gift $65,000 each for a 529 plan, for a total of $130,000 between the two of them. Be aware that the limit is per recipient, so if they have 4 grandchildren the maximum gift they could give is 4 times $130,000 (that is, $520,000) in a single year without incurring a gift tax. To do so, they must file an IRS form 709 and elect the five-year option.

Paul Premack is a Certified Elder Law Attorney and a Five Star Wealth Manager (Texas Monthly Magazine 2009-2013) practicing estate planning and probate law in San Antonio.

Original Publication: San Antonio Express News, August 6, 2010

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