Ed called me because he had just taken over Dad’s finances and the management of care from his brother, Tom. That’s when he made a discovery that troubled him and caused him to reach out to us.
Dad was still living at home alone but his health was declining. Ed began looking at assisted living facilities. At a cost of approximately $4000 per month, Ed was concerned about whether Dad could afford it. So I started to ask him about Dad’s assets and income.
Ed told me Dad has about $300,000 in assets but he then went on to explain that Tom had transferred almost $500,000 out of Dad’s name. He explained that Tom bought and sold investments in Dad’s account so the income was being taxed at Dad’s income level, which was lower than Tom’s. “Is that a problem”, he asked.
“It could be”, I told him. If Dad runs out of money and needs to apply for Medicaid, he’ll have to produce 5 years of records and that’s where the problem lies. They’ll see the money going back to Tom. As I always explain, Medicaid works differently than the criminal system. In the criminal system you are innocent until proven guilty, but the Medicaid system works the other way around.
I told Ed that he will have the burden of proving that the money was Tom’s and not Dad’s. As long as Tom is able to show a paper trail of assets he deposited into Dad’s account that matches the money going back to Tom then no Medicaid penalty will be assessed for a “transfer for less than fair value”.
“But I’m not sure Tom will cooperate. If he admits that the assets are his, could he or Dad run into problems with the IRS or Massachusetts Department of Revenue”, Ed asked.
I have to admit that if Tom is in a higher tax bracket, that would mean a higher tax bill. And if Tom transferred assets to Dad for the purpose of avoiding income tax, he and Dad could be accused of committing tax fraud. I told Ed he’d need to consult with a tax attorney.
My focus, however, was on the Medicaid issue. I had some thoughts on how to avoid a Medicaid penalty. Next time I’ll share them with you.
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