Since under a Section 529 Plan the contributor can reclaim the funds at any time, Medicaid considers it an incomplete transfer, hence no gift when the money is contributed, but only when the option to get the money back terminates, i.e., when a distribution is made to one of the grandchildren.
Anyone concerned with possible application for Medicaid should not be worried about gift taxes–which only apply after you make more than $5.43 million in lifetime gifts–so making gifts to an irrevocable trust that invests in a 529 plan, or creating an irrevocable custodial account that does so, are possibilities. The mechanisms of these arrangements are beyond the scope of this Forum, but suffice it to say that once 5 years has passed from the date of the gift, it can no longer be counted by Medicaid should the gift-giver need to apply for Medicaid.
