Congress has established a period of ineligibility for Medicaid for those who transfer assets. For transfers made prior to February 8, 2006, state Medicaid officials would look only at transfers made within the 36 months prior to the Medicaid application (or 60 months if the transfer was made to or from certain kinds of trusts). But for transfers made after February 8, 2006, the so-called “look-back” period for all transfers is 60 months.
While the look-back period determines what transfers will be penalties, the length of the penalty depends on the amount transferred. The penalty period is determined by dividing the amount transferred by the average monthly cost of nursing home care in the state. For instance, if the nursing home resident transferred $100,000 in a state where the average monthly cost of care was $5,000, the penalty period would be 20 months ($100,000/$5,000 = 20). The 20-month period will not begin until (1) the transferor has moved to a nursing home, (2) he has spent down to the asset limit for Medicaid eligibility, (3) has applied for Medicaid coverage, and (4) has been approved for coverage but for the transfer. Therefore, if an individual transfers $100,000 on April 1, 2010, moves to a nursing home on April 1, 2011, and spends down to Medicaid eligibility on April 1, 2012, that is when the 20-month penalty period will begin, and it will not end until December 1, 2013.
Transfers should be made carefully, with an understanding of all the consequences. People who make transfers must be careful not to apply for Medicaid before the five-year look-back period elapses without first consulting with an elder law attorney. This is because the penalty could ultimately extend even longer than five years, depending on the size of the transfer.
One of the prime planning techniques used before the enactment of the Deficit Reduction Act of 2005 (DRA), often referred to as “half a loaf,” was for the Medicaid applicant to give away approximately half of his or her assets. It worked this way: before applying for Medicaid, the prospective applicant would transfer half of his or her resources, thus creating a Medicaid penalty period. The applicant, who was often already in a nursing home, then used the other half of his or her resources to pay for care while waiting out the ensuing penalty period. After the penalty period had expired, the individual could apply for Medicaid coverage.
Example: Mrs. Jones had savings of $72,000. The average private-pay nursing home rate in her state is $6,000 a month. When she entered a nursing home, she transferred $36,000 of her savings to her son. This created a six-month period of Medicaid ineligibility ($36,000/$6,000 = 6). During these six months, she used the remaining $36,000 plus her income to pay privately for her nursing home care. After the six-month Medicaid penalty period had elapsed, Mrs. Jones would have spent down her remaining assets and be able to qualify for Medicaid coverage.
One of the main goals of the DRA was to eliminate this kind of planning. To determine whether it is still an available strategy in your state, you will have to consult with a local elder law attorney.
Be very, very careful before making transfers. Any transfer strategy must take into account the nursing home resident’s income and all of his or her expenses, including the cost of the nursing home. Bear in mind that if you give money to your children, it belongs to them and you should not rely on them to hold the money for your benefit. However well-intentioned they may be, your children could lose the funds due to bankruptcy, divorce, or lawsuit. Any of these occurrences would jeopardize the savings you spent a lifetime accumulating. Do not give away your savings unless you are ready for these risks.
In addition, be aware that the fact that your children are holding your funds in their names could jeopardize your grandchildren’s eligibility for financial aid in college. Transfers can also have bad tax consequences for your children. This is especially true of assets that have appreciated in value, such as real estate and stocks. If you give these to your children, they will not get the tax advantages they would get if they were to receive them through your estate. The result is that when they sell the property they will have to pay a much higher tax on capital gains than they would have if they had inherited it.
As a rule, never transfer assets for Medicaid planning unless you keep enough funds in your name to (1) pay for any care needs you may have during the resulting period of ineligibility for Medicaid and (2) feel comfortable and have sufficient resources to maintain your present lifestyle.
Remember: You do not have to save your estate for your children. The bumper sticker that reads “I’m spending my children’s inheritance” is a perfectly appropriate approach to estate and Medicaid planning.
Even though a nursing home resident may receive Medicaid while owning a home, if the resident is married he or she should transfer the home to the community spouse (assuming the nursing home resident is both willing and competent). This gives the community spouse control over the asset and allows the spouse to sell it after the nursing home spouse becomes eligible for Medicaid. In addition, the community spouse should change his or her will to bypass the nursing home spouse. Otherwise, at the community spouse’s death, the home and other assets of the community spouse will go to the nursing home spouse and have to be spent down.
While most transfers are penalized with a period of Medicaid ineligibility of up to five years, certain transfers are exempt from this penalty. Even after entering a nursing home, you may transfer any asset to the following individuals without having to wait out a period of Medicaid ineligibility:
- Your spouse (but this may not help you become eligible since the same limit on both spouse’s assets will apply)
- Your child who is blind or permanently disabled.
- Into trust for the sole benefit of anyone under age 65 and permanently disabled.
- In addition, you may transfer your home to the following individuals (as well as to those listed above):
- Your child who is under age 21.
- Your child who has lived in your home for at least two years prior to your moving to a nursing home and who provided you with care that allowed you to stay at home during that time.
- A sibling who already has an equity interest in the house and who lived there for at least a year before you moved to a nursing home.