It’s time to answer another reader question:

Dear Attorney Guertin:

            My mother is law is 86 years old.  In December she moved in with us after her husband passed away.  She has dementia, although we did not know this when she moved in.  Sometime down the road she may need nursing home care.  If she gives away $13,000 to each of her children and grandchildren, will this be taken away from them if she runs out of money in 2-3 years? 

M

North Branford

            M- It is true that the IRS allows any person to gift up to $13,000 to any single person.  This means that any person can give up to $13,000 to any number of individuals without having to file a gift tax return or paying any gift taxes on the transfer.  However, when the question is framed in the context of nursing homes and Medicare it might not be a good idea to gift money out of your estate to “real people.”  Although it is permissible to give funds away under the Internal Revenue Code, the State of Connecticut may be looking for those funds should your mother-in-law need nursing home care provided by Medicaid.

In order for an asset not to be considered when a person is applying for Medicaid, it needs to be out of the applicant’s estate for five years.  Imagine a situation where assets are gifted out in year 1 and in year 3 those assets are needed for nursing home care.  If the person does not have the money to pay for their care they will need to apply for Medicaid.  When you apply for Medicaid, the State will ask for all sorts of information about your assets, including questions about transfers you have made- and believe me, they will investigate.  Funds that were gifted out will count as an available asset if they were gifted within the five year window.  What happens if those assets that were gifted out have been spent, or were lost in a lawsuit or a divorce?  If the assets are not available (to pay for your care) a penalty period will be assessed against the Medicaid applicant.  Imagine that nursing home care in Connecticut costs 15,000 per month.  If the applicant gifted out $45,000 the year before they applied for Medicaid they would be assessed a three month penalty- meaning they would need to pay for their own care for three months.

Gifting to a “real person” is not the best idea and is quite risky.  A better idea would be to gift those funds to an entity such as an Asset Protection Trust.  An Asset Protection Trust is irrevocable by nature.  The grantor (the person who funds the trust) will have no control over the Trust.  Typically, a trusted family member serves as Trustee and manages the assets in the Trust.  The Trust has beneficiaries which will take under the trust after you die.

Asset Protection Trusts are better recipients of the gifted assets because they don’t get sued or get into car accidents or divorced.  If funds are needed to pay for your care they are available through the Trustee.  If you want to play it completely safe an Asset Protection trust is the way to go.

If you would like to learn more about what an Irrevocable Asset Protection Trust can do for you and your family, Guertin and Guertin, LLC will be hosting a no cost, informational workshop on protecting assets on November 2, 2011 at 6pm. If you would like to attend,  please call our office at 203-234-7400.