If you have money to give your children, you certainly can, but you should be aware that you may face consequences should you apply for Medicaid long-term care coverage within five years after each gift. Medicaid’s rules penalizing gifting apply notwithstanding your intention to take advantage of the Internal Revenue Service’s (IRS) gift tax exclusion.
To that end, in 2025, you can give up to $19,000 to any one individual and not report the gift to the IRS. You can give this amount to as many people as you’d like. Conversely, if you give away more than $19,000 to any one person in a single year (other than your spouse), you will have to file a gift tax return. However, this does not necessarily mean you’ll pay a gift tax. You’ll have to pay a tax only if your reportable gifts total more than $13.99 million (in 2025) during your lifetime. This figure is the lifetime gift and estate tax exemption. In sum, the IRS and Medicaid rules are at odds with one another.
Applying for Medicaid
Medicaid is a joint federal-state program that helps seniors and people with disabilities across the United States pay for their health care costs, which may include long-term care services. The program specifically seeks to support those with extremely limited means. To be eligible for Medicaid in New Jersey, you must therefore have no more than $2,000 in assets (or $3,000 for a married couple).
Medicaid allows you to “spend down” on specific types of expenditures. These include prepaying for your funeral services or paying off your medical bills. The catch, however, is that if you transfer your money or property for less than fair market value within five years of applying for Medicaid (with certain exceptions), you will face a penalty that renders you ineligible for benefits for a period of time, despite being otherwise eligible.
So, What Does the Gift Tax Exclusion Have to Do with Medicaid?
Many people believe that if they give away an amount equal to the current annual gift tax exclusion ($19,000 in 2025), this gift will be exempt from Medicaid’s five-year lookback; however, this is not the case.
The gift tax exclusion is an IRS rule, and this IRS rule has nothing to do with Medicaid’s asset transfer rules. While the $19,000 that you may have given to your child or grandchild this year will be exempt from any gift tax, Medicaid will still count it as a transfer that could make you ineligible for long term care benefits for a certain period of time should you apply within the next five years. You may be able to argue that the gift was not made to qualify you for Medicaid benefits, but proving that will certainly be an uphill battle.
Medicaid’s transfer penalty is based on a penalty divisor. In 2025, the penalty divisor is $402.74 per day, meaning, for every $12,082 transferred (gifted) in the five (5) years preceding a Medicaid application, benefits will not be extended to the applicant for one (1) month despite being otherwise eligible.
