Bad advice may spur Medicaid rejection

Q: My wife and I are in the process of placing her mother in a nursing home after she lived with us for several years. We did not charge her for any of her expenses during the time she spent with us because all she has left are four $5,000 certificates of deposit, each in her name and also in the name of one of her four children. When the CDs would mature, she renewed them in the same way. She has been very protective of these funds and wanted to make sure they were passed on to her children because she had spent everything else that she and my father-in-law owned paying for his nursing home care. She had even sold their home and many of their belongings to qualify him for Medicaid.

We were told that there were no problems protecting these funds because she had made gifts to each child years ago, and, by rights, these accounts belong to the children, not her, and will not be counted if she goes into a nursing home. We were told to cash in each CD and let each child take the $5,000. Her only income is $850 per month in Social Security. Can her children cash in the accounts without jeopardizing her Medicaid?

A: You have received very bad advice. Simply creating joint bank accounts with children does not amount to completed gifts. Because the CDs were funded with your mother-in-law’s money, because she maintained control over these assets by making the decisions to renew them, and because she retained the right to change the manner in which the accounts were titled, there were no completed gifts, and she owns the accounts during her lifetime. If your wife and her siblings cash in the CDs now, your mother-in-law will suffer disqualification from Medicaid for a period of time equal to the total amount of the gifts divided by the average private-pay nursing home rate in your state at the time the gifts are made.

Had she transferred ownership of the accounts to her four children and relinquished control before now, gifts would have been made at that time, and the disqualification period would have passed. Whether any of the money earmarked for her children can be saved at this late date is a legal question that will depend on the laws of your state. Rather than rely on bad advice from folks who don’t know what they are talking about, we suggest that you contact an elder law attorney in your area to help guide you in the right direction.

Q: My husband of 40 years was recently diagnosed with terminal cancer. He’s been given no more than six months to live. Until then, he was not willing to discuss any type of planning with me, would not go to a lawyer, and did not even have a will.

While preparing our wills and powers of attorney, the lawyer asked about our assets. I told him about a stock portfolio that was given to me by my mother before she died 20-plus years ago. Mother had inherited the same stocks from her father. Over the years, they have grown more than 15 times in value. I have not wanted to sell the stock because of the capital gains taxes involved, but the lawyer told us that if I put my stocks in my husband’s name, at his death, I would be able to sell them without paying capital gains taxes. My husband told me this was fine with him if it would help me later, but it seems too good to be true. Can this be done?

A: When your mother gifted you the stock, you took the portfolio with what is called a “carryover basis” – that is, your cost starting point in the stock (cost basis) was the same as your mother’s, which, in turn, was the same value as it was when she inherited from her father. Therefore, if you sold the stock, you would subtract your cost basis from the sales price and pay capital gains taxes on the difference. Had your mother left the stock to you by her will, your cost starting point would have been the value on her date of death, and you would have received what is called a “stepped-up basis” that would have reduced the differential between the sales price and your cost.

Your lawyer has suggested that if you gift your stock to your husband and he dies before you and leaves you your stock by his will, you will get a stepped-up basis and not be required to pay capital gains taxes. This is correct, so long as your husband lives for at least one year from the date you transfer your stock to him. If he lives less than one year, you will not be able to take advantage of the step up in cost basis, and your cost basis will be the same as it was before you made the gift to him.

– Jan Warner is a member of the National Academy of Elder Law Attorneys and has been practicing law for more than 30 years. Jan Collins is editor of the Business and Economic Review published by the University of South Carolina and a special correspondent for The Economist.