Private annuities as an aid to medicaid eligibility.

• Author: Schulman, Michael David

Clients often ask CPA PrimePlus practitioners, "How can I qualify for Medicaid?" For too many older adults, Medicaid is the only way to pay for long-term care. As the population ages, more and more older adults face the need to enter a nursing home or other long-term care facility. The costs associated with this can be crippling. With monthly nursing home costs between $5,000 and $7,500, many families find themselves unable to provide this critical care.

Most adults understand the basics of Medicaid eligibility in terms of income and asset limits. In New York, effective Jan. 1, 2004, an individual with annual income in excess of $7,900 and assets in excess of $3,950 cannot qualify for Medicaid. For a couple, the income and asset limits are $11,400 and $5,700, respectively. Each state sets its own limits.

Medicaid eligibility requires many to "self-impoverish"--dispose of sufficient assets to reduce their asset and income levels to qualify for Medicare under their state's limits. Quite often, this entails giving assets away to children, grandchildren or others.

Medicaid requires Rill disclosure of any gifts in the preceding 36 months, or any gifts to a trust in the past 60 months ("look-back" periods). The gift is divided by the average monthly nursing home cost to determine the length of time the applicant has to wait until he or she becomes eligible for Medicaid.

Example 1: On June 1, 2004, E applies for Medicaid. An analysis of her finances discloses a $150,000 gift to her niece in December 2003. E lives in San Francisco, where the monthly cost of a nursing home is $7,500. Dividing $150,000 by $7,500 gives a 20-month period of ineligibility from December 2003. (Note: the period of ineligibility begins at the gift date, not the date of the Medicaid application.)

Although gifting assets might be an effective way to impoverish oneself for Medicaid eligibility purposes, certain non-Medicaid problems can occur:

* There might be a gift tax.

* Not only are the assets lost, so is the income that they produced.

* The recipient receives the property with a carryover basis. If the assets have appreciated, the gains will be taxed when the recipient ultimately disposes of the property.

Example 2: In anticipation of a Medicaid application, J gifts his marketable securities portfolio to his only child, S. J's cost basis was $150,000 and the fair market value was $500,000, if S sells the entire portfolio for $550,000, he will pay a tax on the $400,000 gain. Further, J no longer has the dividend stream as income to pay for medical...