One of the greatest financial risks seniors face is the rising cost of healthcare, including the cost of custodial care in an assisted-living facility or nursing home. And seniors are worried about this. They've worked hard all their lives to build a nest egg and they shudder at the thought of it being spent on their care instead of going to their children.



Some would prefer to have Medicaid (government welfare) pay their nursing home costs so they can leave their assets to their heirs. Medicaid is the government agency that pays nursing home costs for seniors.

To qualify, you can only have $2,000 in assets other than your home. (Be warned, the government has the right to sell your home when you die to recoup the amount they spent on your care.) As a result, many seniors consider gifting assets in an attempt to preserve them.

It is considered fraud to hide assets or to lie to the government when applying for Medicaid. I do not condone that in any way. Gifting, though, is a viable, legal way to protect your estate, but there are certain rules you must follow.

Most people think you can only gift $11,000 per year to someone without having to pay Federal gift taxes. Since Federal gift tax rates start at 41%, you sure want to avoid them!

It will take Doris over 10 years if she can only gift $11,000 per year of her estate. But here's the good news: you can gift over $11,000 each year without having to pay Federal gift taxes! Each person has a lifetime gift-tax credit that results in being able to gift $1,000,000 without any Federal gift taxes.

So Doris can gift $100,000 to her son all at once. She just needs to tell the IRS to consider the part over $11,000, or $89,000, as a part of her $1,000,000 lifetime exemption. That's done by filing Form 709 with her taxes that year.

Notice I kept referring to Federal gift taxes. You may still be subject to state gift taxes. For instance, here in Tennessee, there is a 6% tax on gifts over $10,000 per person per year and there isn't any lifetime exclusion. Be sure to investigate the laws in your state.

Just because Doris gifts away all of her assets today, she can't qualify for Medicaid tomorrow. By law, Medicaid can investigate to see if you gifted away any assets within the three years prior to your application. If so, they will deny you benefits for the number of months those assets would have paid for.

Let's say Doris applies for Medicaid within 3 years of gifting $100,000 to her son. Assuming nursing home care in her area costs $3,000 per month, Medicaid wouldn't start paying those costs for 33 months! Medicaid figures that the person the money was gifted to will feel obligated to pay the costs until then. Still, it's better for Doris to gift as much as she can, as soon as she can, so the 3-year clock starts ticking.

One concern Doris has about gifting her assets to her son is that he could lose half the amount if he gets divorced. She would like to prevent that if possible. If she trusts her son and wants him to have control over the money but also wants it protected from creditors, future estate taxes and from loss in a divorce, then Doris can gift the assets to a Beneficiary Trust instead.

Beneficiary trusts are expensive to set up and probably shouldn't be used unless you want to protect several hundreds of thousands of dollars in assets.

The bottom line is that there are ways that you can gift large amounts without paying federal gift taxes. This is a legal form of Medicaid planning. It can also be used to reduce the size of taxable estates.