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Medicaid Planning, Taxes and the Internal Revenue Service

Medicaid Planning, Taxes and the Internal Revenue Service: A Radio Interview of Attorney John R. Frazier by Attorney Joseph Pippen

Attorney Pippen:             Hey, we have attorney John Frazier, a Medicaid attorney online, and good morning, John.

Attorney Frazier:             Hey Joe, how you doing today?

Attorney Pippen:             Happy Easter to you.

Attorney Frazier:              Thank you. You too.

Attorney Pippen:             All right. So what are we talking about? John calls in with his Medicaid planning tip of the week. So what are we talking about today?

Attorney Frazier:              Well, today, since it’s we’re in the middle of tax season, I was going to talk about Medicaid planning, taxes and the Internal Revenue Service. In the Medicaid planning context, there can be a number of tax considerations, income taxes, gift taxes, potentially gift tax returns. And my typical client, about 90% of my clients, are long-term residents of nursing facilities. About 10% are assisted living facility residents. And in order to obtain benefits, and also most of my clients, especially in a long-term nursing facility setting, pretty much have to apply for Medicaid because the average cost of care is about $9,500 per month. So in order to obtain Medicaid qualification, we have to move assets around, restructure assets, liquidate assets, and all of those actions can have potential tax consequences. So as we’re working on a Medicaid planning case, we are always thinking about potential tax implications of the things that we do.

One example would be is if we have to liquidate or sell stock, for example. So if you sell stock, you can have a capital gain or a capital loss on the sale of that stock. If you’ve owned the stock for more than a year, that would be a long-term capital gain. The maximum tax rate would be 20%. However, if you’ve held the stock for less than a year, the tax rate is much higher. It’s taxed at ordinary income rates and the maximum rate is 37%. So that’s one tax consideration that we need to think about. Another thing that we need to think about is anything that we do going to create the need for a tax return. Most of us are familiar with the 1040 tax return, a tax return for an individual, but there are other potential tax returns.

We can have IRS form 1041, which is a tax return for a trust or an estate. And in some of my cases, about 25% of my cases, we have to set up something called a qualified income trust. The state of Florida has an income limit on Medicaid, and that is $2,382 a month in income. So if the Medicaid applicant exceeds that amount, we have to set up what is called a qualified income trust and you have to also set up a new bank account for that trust. When you take the trust to the bank, the IRS says as around the mid-1990s, you can open that checking account up under the Medicaid applicant’s social security, but in the old days, we had to use something called an employer identification number. And that is actually the identification number that is used on a 1041 tax return.

So if the trust does not generate income, we would not need to do the 1041 tax return. Another tax return that we might have to do, depending on the type of planning that we do is IRS form 709, which is a gift tax return. Sometimes in a smaller number of my cases, we might do Medicaid pre-planning. The state of Florida has a five-year look back on transfers. So if you have a healthy parent who may need care of longer than five years from the present date, you can set up an irrevocable trust, give assets to the irrevocable trust and then after five years you do not have to disclose that transfer, or at least the transfer itself to the state of Florida. You would probably have to disclose the trust, but not the transfer itself. And we would set up an EIN under a trust like that.

We would also have to do a 709 gift tax return if the amount of the transfer was more than $15,000. The $15,000 amount is the amount of what is called the annual exclusion. And that means that any person can give away up to or less than $15,000 and then that person would not have to file a gift tax return unless the gift exceeds $15,000. Another issue that we can potentially see is we might also employ a strategy called a personal services contract. So this is a legal contract where we can pay a lump sum of money to a family caregiver to reduce the countable assets of the Medicaid applicant. So if we pay a family caregiver $50,000 under a caregiver contract, under section 61 of the internal revenue code it’s very clear that that type of payment would have to be reported on the recipient’s 1040 income tax return for that year.

Another consideration that we’d sometimes need to think about in a smaller percentage of my cases, but a fairly significant number of cases also are the treatment of individual retirement accounts or IRAs. So if we, for example, were to liquidate an IRA and not roll that IRA over into a new IRA within 60 days, the person would have to pay income taxes on that. Here in Florida, we generally don’t have to do that because we can establish a monthly payout according to a formula and the state of Florida will treat that IRA as exempt. The last consideration that I was going to talk about, also very important, is the state of Florida has what is called a data exchange system. So when a person applies for Medicaid, both the spouse and the Medicaid applicant, they have to disclose their social security number. So everything’s done under a social security number.

The DCF caseworker will then type in both social security numbers into their data exchange system and the Florida Department of Children and Families caseworker can pull up old 1099s to determine whether or not any assets have been left off the Medicaid application. So it’s very, very important to know that the state of Florida actually checks these things out and all Medicaid applicants are required to sign a DCF form called a financial information release, DCF form 2613, which authorizes the state of Florida to input the social security number and pull up old 1099s regarding taxes and also to verify the person’s social security benefits with the Social Security Administration. So as you can see, there are a number of considerations in each of these Medicaid planning cases that we have to deal with.

Attorney Pippen:             Okay John, thank you so much for all that information on Medicaid planning, taxes and the internal revenue service. Why don’t you give the audience your contact information if they want to contact you about any Medicaid issues they might have?

Attorney Frazier:              The office number is (727) 586-3306, extension 104. My cell phone is (727) 748-5374. And my email address is

Attorney Pippen:             All right John, thank you so much for calling and I hope you have a great rest of the day.

Attorney Frazier:              Okay, you too. Thank you.

Attorney Pippen:             All right. Thanks.

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