Will my mother’s life insurance policy cause a Medicaid penalty?

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Q. My mother’s life insurance policy has a cash surrender value of approximately $20,000. She has lived with us for more than three years. If she cashed out her policy and gifted the money to me, is the five-year penalty period waived?
— Daughter

A. This could be an issue.

You’re talking about the Medicaid “look back” period, a five-year window during which Medicaid would review all your mother’s financial records to see if she qualifies for assistance.

One thing they would be looking for is whether she gave away assets, said Betty Thomas, a chartered financial consultant and certified financial planner with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.

She said the $20,000 cash surrender value of her life insurance policy would be counted as her asset because in most states you cannot have more than $2,000 to qualify for Medicaid.

“If you have documented what you have been spending for your mother’s care with receipts or checks for the past three years, then the cash surrender value from the policy could be considered a reimbursement to you for monies spent on her behalf,” Thomas said. “But if you do not have documentation, the money gifted to you could delay your mother qualifying for aid if she should need to apply for Medicaid assistance.”

Also, she said, if your mother surrenders the policy and gives the proceeds to you as a gift, she exceeds the annual gift tax exclusion of $15,000.

That means she would have to report the amount of the gift over the $15,000 annual exclusion to the IRS when she files her taxes, Thomas said.

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This story was originally published on Aug. 26, 2020.

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