Gifts to Charity as a way to Protect against Long Term Care Costs

Today’s blog post continues the series about giving money away as a method to plan ahead for protection against long term care costs.  My post of September 19, 2014, the first installment of the discussion on gifting, described how the Medicaid “Aged, Blind and Disabled” program and the Department of Veterans Affairs “Pension” (aka VA “Aid and Attendance”) program look at assets given away.  My post of September 25, 2014 discussed transferring assets to a trust for protection against long term care costs.  My post of October 2, 2014 discussed transferring assets to a Limited Liability Company for protection against long term care costs.  My post of October 9, 2014 discussed transferring assets to your children (or other family members) for protection against long term care costs.

The current series on gifting is part of a more comprehensive series on possible ways to plan ahead to protect against long term care costs.  Previously, my blog discussed long term care insurance as an approach to planning ahead for long term care costs.  In the long term care portion of this discussion, my post of May 22, 2014 discussed whether to buy long term care insurance at all.  My post of May 29, 2014 suggested looking for a stable, proven insurer.  My post of June 5, 2014 described how to identify a proven, stable Long Term Care insurance company.  My post of June 12, 2014 discussed the importance of protection against inflation. My post of June 19, 2014 suggested planning to use insurance to pay for four or five years of long term care.  My post of June 22, 2014 suggested a daily rate to choose when purchasing long term care insurance.  My post of July 10, 2014 advised to look carefully at the list of Activities of Daily Living that can trigger coverage from the long term care insurance policy.  My post of July 17, 2014 described the differences between a “period of time” kind of coverage and a “pile of money” kind of coverage.  My post of July 25, 2014 advised to make sure that the long term care insurance includes coverage for cognitive impairment.  My post of July 30, 2014 described the differences between tax-qualified and non-qualified policies.  My post of August 5, 2014 discussed the value of long term care insurance policies that qualify for the Partnership program.    My post of August 14, 2014 discussed hybrid policies that combine long term care insurance with life insurance.  My post of August 21, 2014 described how a long term care insurance policy with a return of premium rider can be used to construct a “hybrid” life insurance/long term care insurance policy.  My post of August 28, 2014 described how to use a partnership policy to protect just enough of your life savings while holding down the cost of the insurance.  My post of September 5, 2014 described how to coordinate long term care insurance with potential veterans benefits.  My post of September 12, 2014 discussed how an elder law attorney can help maximize the value of long term care insurance.

The introductory post in the series on planning ahead for long term care costs appeared on May 15, 2014.

Today’s post, as part of the sub-series on to how to give assets away, discusses gifts to charity as a method to protect the gifted assets from the costs of long term care in the future.

Donations to charities are improper transfers according to Medicaid and perhaps to the VA.  Gifts to charities are rare for long term care pre-planning.

Why make a gift to charity?

Gifts to charities have income tax consequences completely separate from long term care planning.  Gifts to recognized charities create tax deductions.  Gifts that have appreciated above the original investment create tax deductions higher than the cash cost.  Those tax consequences do not change how Medicaid and the VA view gifts to charities, however.

Perhaps because of the tax consequences (or perhaps regardless of the tax consequences,) gifts to charity may fulfill an individual or family plan for philanthropy.  Gifts to charities can support good works that are important to the donor.

In addition, gifts given while the senior is alive avoid the probate process (perhaps unless the senior dies shortly after the gift.)

Considerations when making a gift to charity

Don’t transfer everything you have.  You still need to live off your life savings.  Keep enough back to support yourself for the foreseeable future.  (Remember, at the time you’d make this gift, you don’t yet need long term care.  It’s a PRE-planning tool.)

Good records of the donation may be necessary, especially if the donation is large.  An acknowledgement from the charity may be required as part of the income tax records.  Depending on the type of gift, an appraisal may be necessary.

Depending on the type of gift and on whether other non-charitable gifts are given in the same year, the charitable donation may need to be reported on a gift tax return.  There should not be an actual tax on the charitable gift, but the gift may require reporting.

Why not make a gift to charity?

First, you must decide if you’re worried about the possibility of long term care costs in your future.  If you’re not worried, then don’t use gifting for the purpose of pre-planning.

A gift does not protect the gifted assets from long-term care costs until the five-year look back period has passed, according to the requirements of Medicaid, even if the gift is to a charity.  (This means, if you feel that you will need long term care within the next five years, you should talk with an elder law attorney before making any gifts at all so you can make a plan that addresses your likely care needs.)

Similarly, with the VA starting to look back at prior income tax records and at least inquiring about now seemingly missing assets, gifts to charity risk the possibility that the VA will deny an application for Pension (aka Aid & Attendance benefits.)

Tithing, even a history of tithing, has not overcome Medicaid’s aversion to gifts.  Recent cases in which seniors seeking Medicaid have given to their churches, even with a long history of making such gifts, have resulted in denials of Medicaid benefits for the applicants.

A gift to charity cannot be reversed (not usually anyway.)  If the donor needs long term care (i.e., needs Medicaid or VA Pension or both) within the look back period, a charitable donation cannot be reversed to allow the senior to switch to a crisis type of plan.

As I’ve mentioned with other gifting strategies, the biggest drawback to a charitable gifting strategy, in my opinion anyway, is that you give up control of the money that you give away.  Imagining myself retired, I’m not sure that I’d be emotionally comfortable giving up control of a big part of my life savings.

It’s your choice.

Perhaps you have no fear of any of the risks I describe.  Perhaps you want to make sure that your favorite charities receive your support.  If so, then give to those charities, but only with a small portion of your assets.  Small gifts may be compensated for with other assets and, therefore, absorbed into a crisis plan for long term care costs.  Large gifts to charities can leave an unlucky donor (who needs long term care surprisingly soon after the charitable donation) without the ability to pay for care or to qualify for government benefits to pay for care.

For more information, visit Jim’s website.

Jim Koewler’s mission is
“Protecting Seniors and People with Special Needs.”

For help with long term care or with planning for someone with special needs,
call Jim, or contact him through his website.

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