Some Basic Tax Issues in the Elder Law Area

It has been said that the "ideal" Elder Law attorney be knowledgeable both in the Medicaid rules and tax issues.

For example, if monies are transferred as part of a Medicaid plan (currently Reverse Half-a-Loaf is disfavored by the State, see Medcom 10-02 and 10-06), in any case, clients often have the impression that the receipt of monies gifted result in income. That is clearly not the case as Section 61 of the Internal Revenue Code provides that receipt of all funds results in taxable income except if there is a specific exclusion. Section 102 of the Internal Revenue Code provides that any monies gifted are not subject to income tax. Therefore, if transfers are made for any reason, it is only the earnings on the transfer that are subject to the tax and not the gift itself.

Another issue discussed in many of my blogs relates to transfer of a house (for example, see Post 6 dealing with transfer of a home to a "protected transferee"). This deals with transferring a home to a child who provided necessary care for two years before a person enters a nursing home. The law indicates in such a case a transfer of the home to the child is exempt from the transfer rules. I have recommended that the transfer not occur until the Medicaid application proceeding. The reasons are set forth in Post 6. An additional reason would be that if the individual dies before a Medicaid application, the basis of the house to the beneficiary will be "stepped-up" the date of death. However, once the property is transferred, there is a "carry-over basis" and the transferee will have the same basis as the donor.

Another misconception by clients is that distributions from an estate are subject to income tax. Under the fiduciary income tax rules, the distributions are only subject to tax to the extent of the estate income (technically referred to as distributable net income). Of course, there are exceptions to this rule, such as life insurance, the distribution of which is not subject to tax except for minor items, such as post-mortem dividends.

Any Medicaid planning or estate planning must include tax advice. The above are just some basic issues and rules to be discussed.


Disclaimer: This article does not constitute legal advice and each person may have unique facts for which legal consultation may be necessary.

© October 2010, Post 117