Most people have heard that gifting an asset can cause problems if you later need to apply for Medicaid to cover a nursing home stay. Especially if you use gifting as a way to minimize or "spend down" your assets.

But what exactly are the rules you need to be aware of when helping an elderly loved one qualify for Medicaid?

Lookback period

That five-year period that precedes the date of your Medicaid application is known as the "lookback period."

It doesn't matter how many gifts you made during that period, or to whom they were given (with certain exceptions discussed below); all gifts you made during that five-year lookback period will be added up and divided by the penalty divisor to come up with the number of months in your penalty period.

Penalty period

The general rule is that any gift an individual makes within five years of applying for Medicaid will result in a subsequent period of disqualification, which will occur after that person applies and becomes eligible for Medicaid coverage.

This chunk of time is referred to as the "penalty period."

For example, if you write a check to your son for $10,000 and apply for Medicaid within five years from the date on the check, then Medicaid will delay covering your expenses in the nursing home for some period of time.

Note that the clock for the penalty period begins running the day a person becomes eligible for Medicaid coverage, not the date on which they gifted the money.

The length of the penalty period depends on the state's "penalty divisor." The penalty divisor is the approximate average cost of a nursing home in your state; a figure published annually by each state's Medicaid department.

For example, in Arkansas, the penalty divisor is currently just under $5,000, while on Long Island, NY, it is over $12,000 per month. Thus, that $10,000 gift would cause a two-month penalty period in Arkansas, but a less than one month penalty period on Long Island.

There is no limit to how long a penalty period can be.

For example, if you live in a state with a $5,000 penalty divisor, deeded your $350,000 home to your daughter, and then you applied for Medicaid within the next five years, you would be faced with a 70-month penalty period! Since that is longer than the five-year (60-month) lookback period, you would want to delay applying for Medicaid until the five-year period had passed, in order to avoid that harsh result. You could apply for Medicaid the day after the five-year lookback period expires and the gift of that house would be ignored by the Medicaid department in your state.

Exceptions to the Medicaid gift rule

Not all gifts cause the imposition of a penalty.

For example, say your daughter lived in the aforementioned house while taking care of you for at least two years before you applied for Medicaid. If your daughter's care enabled you to delay a move to a nursing home, then the transfer of the house into your daughter's name will not result in any kind of penalty, even if you apply for Medicaid within five years of the transfer.

Another exception to the general rule is a gift (or the creation of a trust) for a child who is blind or disabled under the Social Security rules. No penalty will attach to such a gift, no matter how large.

Finally, there is never any penalty on gifts between spouses. Since the total assets of both spouses are counted when one spouse applies for Medicaid, there is no reason to impose a penalty on such transfers, and indeed that is exactly how the law reads.