Q: The more I read about Medicaid, the more confused I get. Can someone explain how the 5-year "look back" period for Medicaid is related to the IRS $14,000 gift exemption?
A: I am an attorney with 25 years' experience doing Medicaid planning. Let me clear up a few items discussed above:
The $14,000 IRS gift exemption
This figure relates solely to a Federal GIFT TAX exemption and has no relation to Medicaid rules. Anyone concerned with Medicaid coverage will never make anywhere near the $5,450,000 of lifetime gifts permitted before a federal gift tax is due! Thus, for all practical purposes, the $14,000 limit can be ignored for anyone worried about Medicaid.
The 5-Year Medicaid Lookback
When a person makes a gift of virtually any amount within the 5-year period preceding the date that person applies for Medicaid, those gifts are added together and will result in a disqualification period. The length of the disqualification (or "penalty") period depends on the total amount of the gifts made within the 5-year period and also the penalty divisor of the state where they are applying for Medicaid. A penalty devisor is the average monthly cost of long-term care in the applicant's state. For example, in a state where the penalty divisor is $5,000, if the total gifts made within the lookback period equal $50,000, then the penalty period will be 10 months.
So the bottom line is that there is NO minimum amount a parent can gift their children to avoid the 5-year lookback period. But once 5 years have passed following a particular gift, that gift will no longer count when the person who made the gift applies for Medicaid.
I hope that helps!