Medicaid is a program that helps low-income seniors with limited assets afford health care and long-term care. In addition to meeting some medical criteria, applicants must also abide by strict financial eligibility requirements both before applying for Medicaid and after they have qualified.
Financial Eligibility Requirements for Long-Term Care Medicaid
Many seniors with limited resources find that their countable assets and/or income exceed their state’s Medicaid limits. To meet the financial requirements, they must carefully minimize or “spend down” excess funds on things like medical expenses, home improvements, a prepaid funeral plan, etc. Gifting (giving away money or assets for less than fair market value) cannot be part of an applicant’s spend-down strategy for Medicaid.
To prevent seniors from simply giving all their assets away to family and friends and then relying on Medicaid to pay for their long-term care, the Centers for Medicare and Medicaid Services (CMS) created a system for reviewing all applicants’ financial histories. The following sections detail the ins and out of the notorious Medicaid look-back period and what happens if a senior transfers assets for less than fair market value (FMV).
The Medicaid Look-Back Period
Medicaid only reviews applicants’ past financial information within a specific window. Each state’s Medicaid program uses slightly different eligibility rules, but most states examine all a person’s financial transactions dating back five years (60 months) from the date of their qualifying application for long-term care Medicaid benefits. (In California, this window is only 30 months.) This is known as the Medicaid look-back period.
It doesn’t matter how many gifts an applicant made during the look-back period or to whom they were given (with certain exceptions discussed later on). If money or assets changed hands for less than FMV during the five years preceding a senior’s application date, then they will incur a penalty period of Medicaid ineligibility.
The Medicaid Penalty Period
The general rule is that if a senior applies for Medicaid, is deemed otherwise eligible but is found to have gifted assets within the five-year look-back period, then they will be disqualified from receiving benefits for a certain number of months. This is referred to as the Medicaid penalty period.
For example, if you write a check to your adult son for $14,000 and apply for Medicaid long-term care within five years of the date on the check, then Medicaid will delay covering the cost of your nursing home care because you could have used that money to pay for it yourself. Note that the clock for the penalty period begins running on the date a senior applies for Medicaid coverage, not the date on which they gifted the money.
The length of the penalty period depends on the total amount of assets an applicant transferred and their state’s unique “penalty divisor.” The penalty divisor is the average monthly cost of a nursing home in a particular state. (In some states, the divisors may be average daily costs, and many states even use divisors that are specific to nursing home costs in individual counties.) These figures are published annually by each state’s Medicaid program.
For instance, in Ohio, the monthly penalty divisor is $6,905 in 2020. Meanwhile, on Long Island, NY, the monthly divisor is $13,407. Therefore, that $14,000 gift mentioned earlier would cause a penalty period of about two months in Ohio ($14,000 ÷ $6,905 = 2.03 months) but just over a one-month penalty period on Long Island ($14,000 ÷ $13,407 = 1.04 months).
Who Pays During Medicaid Penalty Periods?
Keep in mind that there is no limit to how long a penalty period can be. Many families wonder what happens when a senior needs care, has spent down all their assets (improperly) and wound up ineligible for coverage. Who pays for their care? If a senior has gifted countable assets during the look-back period and requires a nursing home level of care, they (or their family) will have to pay for this care out of pocket somehow until either the look-back period has passed and the senior can apply for Medicaid without issue or until the penalty period runs out and they become eligible for coverage.
For example, if you live in a state with a $5,000 monthly penalty divisor, use a gift deed to transfer ownership of your home worth $350,000 to your daughter, and then apply for Medicaid four years later, you would be facing a 70-month penalty period! Ideally in this scenario, you would wait one more year until the asset transfer was just outside of the look-back period to apply for Medicaid. Yes, you and/or your family would have to pay for one year of nursing home care out of pocket totaling approximately $60,000. But, it would make far more sense than applying for Medicaid as soon as you need long-term care and incurring a nearly six-year penalty period during which you would still be responsible for paying your own long-term care costs. Remember, any gifts that take place outside of the five-year look-back period do not count against one’s eligibility.
Exceptions and Exemptions to Medicaid Gifting Rules
Not all gifts trigger Medicaid penalties.
Continuing with the previous example, say your daughter lived in the aforementioned house while taking care of you for at least two full years before you applied for Medicaid. If your daughter’s care enabled you to delay the move into a nursing home, then the transfer of your house into her name for less than FMV (free) would not result in any kind of penalty. This “child caregiver exemption” is valid even if a senior applies for Medicaid within five years of the transfer.
Another exception to the general rule is a gift (or the creation and funding of a trust) for a child who is blind or disabled under the Social Security Administration’s rules. No penalty will be attached to such a gift, no matter how large.
Finally, there is never any penalty imposed on gifts between spouses. Since the total assets of both spouses are counted when one spouse applies for long-term care Medicaid, there is no reason to impose a penalty on such transfers, and that is exactly how the law reads.
Undoing a Medicaid Gift Penalty
It is possible to remedy a disqualifying asset transfer within a look-back period if all the gifted assets are returned to the Medicaid applicant. (In some states, returning only part of the gifted funds will reduce the penalty period accordingly, but other states do not accept partial returns.)
This is not always, possible, though. Monetary gifts to family and friends may have already been spent, or they may refuse to return these assets. Of course, returning these funds will most certainly result in excess resources and still disqualify the applicant. However, they would have another opportunity to properly spend down their assets and fund their own care, if only for a short time, before qualifying for Medicaid long-term care.
Seek Professional Help With Medicaid Planning
The bottom line is that successfully applying for Medicaid is very rarely a do-it-yourself project. Even finding professionals who have a clear understanding of a particular state’s Medicaid program and eligibility requirements can be difficult. Mistakes can have devastating, long-term effects on a family and their finances. If you or someone you know plans to apply for long-term care Medicaid, it’s best to research certified elder law attorneys and even financial planners in your area to guide you through the application process.