I thought I could make a tax-free gift each year to my children without any problems.

Many of our clients mistakenly confuse the gift tax laws with the Medicaid eligibility rules.  The amount that the IRA allows you to gift tax-free each year, otherwise known as the “annual exclusion amount,” has nothing to do with Medicaid eligibility.  They are different rules for different purposes.  Many people have learned to their great dismay that their perfectly legal tax-free gifts were treated as divestments under the Medicaid rules, which rendered them ineligible for benefits.