After answering a number of questions over the past week related to Medicaid and Wisconsin's implementation of the Deficit Reduction Act of 2005 (DRA), I thought it would be a good time to explore the often misinterpreted rules involved in this area. To start it is important to have an understanding of the terms involved in the areas of Medicaid and Gift Tax respectively. In the Medicaid or Medical Assistance area the term I would like to focus on is Divestment. In the Gift Tax area I would like to focus on the terms Gift and Annual Exclusion Gifts. These terms are defined as follows:
Divestment: The transfer of income, non-exempt assets, and homestead property, which belong to an institutionalized person or his/her spouse or both, for less than the fair market value of the income or asset. It is also divestment if a person takes an action to avoid receiving income or assets s/he is entitled to. Wisconsin Medicaid Eligibility Handbook Section 4.7.2.1 Divestment.
Gift: The transfer of any property or the right to income from any property without the expectation of receiving something of equal of at least equal value in return.
Annual Exclusion Gifts: In 2007 each person is allowed to gift up to $12,000 to as many different people as they so choose without paying any gift tax on the transfer. For married couples this amounts to $24,000 that they may transfer as a couple to children, grandchildren, or whoever they want to gift it to.
You may notice in the above definitions that gifts and divestments are relatively close. Basically they each mean you have given something away but you did not receive equal value in return. However as this post will show, the similarities between Medicaid and the Gift Tax pretty much end there.
As I mentioned above this post was prompted after a few clients asked recently about Medicaid and long-term care planning. They each said something along of the lines of this, "Well I can give away up to $12,000 a year, per person to anyone that I want, right?" Technically the answer to this question is yes, but that is only from a Gift Tax perspective. A person could certainly give away up to $12,000 a year, per person and they would not pay any Gift Tax. However, those same $12,000 Annual Exclusion Gifts would be considered Divestments from a Medicaid / Medical Assistance perspective. Under the DRA 2005 any Divestment in the 60 months preceding the submission of an Application for Medical Assistance will result in a period of ineligibility or a penalty period where Medicaid will not provide benefits.
The intersection between the two different systems is that a gift and a divestment both involve the transfer of property for less than fair market value. However the consequences and the details in each area are very different. As I have mentioned before it is very worthwhile to consult with an attorney knowledgeable in Elder Law before venturing too far into the Medicaid world. The old adage, "An ounce of prevention is worth a pound of cure," is certainly appropriate in these situations.
