The Tax Mistakes Florida Families Make While Protecting Assets From Medicaid

Roger's Situation: A Well-Meaning Idea With a Hidden Cost

Roger is 79, lives in Windermere, and has done reasonably well for himself: a paid-off house that has appreciated substantially since he bought it decades ago, and a modest but appreciated stock portfolio he built up over a working life. Roger is a composite, not an actual Truestead client, but his situation is one I see often. His son, trying to help, suggested the simplest-sounding fix: just deed the house and transfer the stock to the kids now, so it's "out of Dad's name" before Medicaid ever becomes an issue.

I understand the instinct completely. Families want to move fast and protect what a parent worked for. But the fastest fix is often the most expensive one once the accountant gets involved. Outright gifts made during Roger's lifetime don't just raise Medicaid look-back concerns (which Truestead covers in our five-year look-back guide). They also change who owes capital gains tax, and how much, when that asset is eventually sold.

Carryover Basis vs. Stepped-Up Basis: Why the Timing of a Transfer Matters

This is the piece of the puzzle that gets overlooked in the rush to protect assets. Every asset has a cost basis, generally what was originally paid for it, and gain is measured against that basis when the asset is sold.

• Lifetime gift (carryover basis): When Roger gives his son appreciated stock or a house today, the son generally receives Roger's original, lower basis. If the son later sells, he owes capital gains tax on all the appreciation that happened during Roger's lifetime, not just appreciation after the gift.
• Inheritance at death (stepped-up basis): If Roger instead keeps the asset in his name, or in a properly structured trust, until his death, the asset generally receives a basis adjustment to its value at death. Years, sometimes decades, of appreciation can effectively disappear for capital gains purposes.

For a home purchased decades ago in a fast-appreciating area like Windermere, or for stock bought at a fraction of today's value, this difference is not academic. It can mean tens of thousands of dollars in avoidable capital gains tax for the very children the gift was meant to help.

The Home, the Section 121 Exclusion, and Why It Doesn't Solve Everything

Families sometimes assume the federal home-sale exclusion under Internal Revenue Code Section 121 will bail out a gifted house. That exclusion lets an owner who has lived in a home as a principal residence exclude a set amount of gain on sale. It's a real and valuable benefit, but it belongs to whoever owns and occupies the home at the time of sale.

If Roger gifts the house to his son and the son doesn't live there as his own principal residence, the son likely can't use that exclusion at all on Roger's built-up appreciation. And if the house is sold quickly after the gift to raise cash for Roger's care, there may be little time for the son to establish the residency the exclusion requires. The exclusion is a tool for an owner-occupant, not a general fix for a transferred asset.

The Gift Tax Return Almost No One Actually Owes (But Many Fear)

A lot of families hesitate to gift because they've heard about "gift tax." In practice, most Florida families who make a gift above the annual federal exclusion amount simply file an informational gift tax return (IRS Form 709) and apply the excess against their lifetime federal gift and estate tax exemption, which is quite large. No actual tax is typically due unless a person's lifetime gifting has already used up that substantial exemption.

The catch is this: the federal gift tax exclusion and Medicaid's rules are two completely separate systems. A gift that requires no gift tax return at all, or one that's fully covered by the lifetime exemption, can still be a disqualifying transfer under Florida Medicaid's five-year look-back. Being "gift tax free" says nothing about being "Medicaid safe."

Grantor Trusts: How a Medicaid Asset Protection Trust Handles Taxes Differently

This is where the planning conversation with Roger actually changed course. Rather than gifting the house and stock outright, a Medicaid asset protection trust (a type of irrevocable trust used in Florida elder law planning) can be drafted so that, for income tax purposes, Roger is still treated as the owner of the trust assets during his lifetime. This is called grantor trust status.

• Because Roger is treated as the owner for tax purposes, the trust's income is reported on his own tax return, and no separate, often higher, trust income tax return is required.
• Because the assets remain in Roger's taxable estate for federal estate tax purposes (even though they're protected from creditors and structured to be outside his countable Medicaid assets after the look-back period passes), the assets can still receive a stepped-up basis when Roger passes away.
• That step-up can substantially reduce or eliminate the capital gains his family would otherwise owe on the house or the stock.

In other words, a properly drafted trust can accomplish something an outright gift cannot: asset protection from long-term care spend-down, without permanently sacrificing the family's favorable tax basis.

What the Plan Looked Like for Roger

Rather than deeding the house directly to his son, Roger's plan (in this composite scenario) involved transferring the home and a portion of the appreciated stock into a properly drafted irrevocable Medicaid asset protection trust, with grantor trust provisions built in and full coordination with his CPA on the income tax reporting. The trust started its own five-year look-back clock, exactly as an outright gift would have, so timing still mattered and had to be planned well ahead of any anticipated care need.

But unlike his son's original idea, the assets stayed positioned to receive a step-up in basis at Roger's death, Roger continued reporting the trust's income on his own return with no new tax complexity, and the house and stock were shielded from being counted against him if he later needed nursing home level care. The tax mistake his son almost made, an outright gift that would have quietly cost the family a meaningful chunk of the home's appreciation in capital gains, was avoided entirely by using a trust structure instead of a deed transfer.

Sources

• Elder Needs Law, "Florida Medicaid Changes 2026 What You Need to Know," January 23, 2026
• Greenbush Financial Group, "Don't Gift Your House To Your Children," April 11, 2026
• Saving Advice, "Signing the House Over Can Erase the Step-Up and Trigger Medicaid's 5-Year Look-Back," September 22, 2026
• Alper Law, "Medicaid Asset Protection Trust in Florida," April 23, 2026
• Elder Law Answers, "Giving Your Home to Your Children Can Have Tax Consequences," April 29, 2026
• Wealth Counsel, "The Taxation of the Medicaid Asset Protection Trust," May 2, 2023

This article is for general informational purposes only and does not constitute legal advice, nor does reading it create an attorney-client relationship. Florida estate, elder, probate, and real estate law are fact-specific and change over time. Consult a licensed Florida attorney about your individual circumstances. Arthur Simpson, Esq. is licensed to practice law in the State of Florida. Attorney advertising.