Medicaid is a federal/state program helping low-income seniors with limited income and assets afford healthcare and long-term care. Many seniors believe their only option to qualify for the program is to “spend down” their assets. While this is true in some cases, proactive Medicaid planning can protect a substantial portion of your assets if done correctly. The program’s eligibility rules are complicated, as is the application process, so it is best to navigate the process with a specialized Medicaid planning elder law attorney well before you need to tap the benefits.
The general rule is that anyone gifting assets within five years of applying for Medicaid is likely subject to a penalty, making them ineligible for this funded care. This review of past financial history is called the look-back period. The imposition of this penalty is to stop those who transfer their assets without receiving fair value in return. In essence, you cannot gift most of your assets to your children on Wednesday to qualify for Medicaid long-term care on Thursday.
A Medicaid penalty period addresses those individuals who would otherwise be Medicaid eligible but do not pass the five-year look-back rule. Medicaid arrives at the penalty period by dividing the transferred amount by the average private pay cost of a nursing home in your state. The penalty period begins when the person making the transfer either moves into a nursing home, spends down to asset limits for Medicaid eligibility, applies for Medicaid coverage, or has coverage approval excepting for the transfer. There is no limit to the length of a penalty period.
Congress created a significant loophole regarding the transfer penalty for those individuals planning for future Medicaid to help fund their long-term care. Medicaid may revoke the penalty if the transferred asset is returned in full, or the penalty will receive a reduction if the transferred asset is partially returned. This situation is dependent on your resident state as some do not permit partial returns, only giving credit for the total return of assets transferred.
Although it is preferable to address your long-term care planning far in advance of your care requirement, there are still some strategies to employ that avoid spending all of your assets. If you are in a state that permits partial asset return, your elder law attorney can leverage this rule to preserve some of your assets using “half a loaf” strategies. If a Medicaid applicant has excess assets and must spend down to reach the typical $2,000 asset limit, they may be able to preserve some assets as follows:
Gift and cure: If you live in a state that participates in Medicaid partial refunds, this strategy sees the nursing home resident transfer all of their funds to their children or other family members and applies for Medicaid and receives a long period of ineligibility. After the application submission, the children, or whomever, return half of the assets transferred in effect, “curing” half of the ineligibility period. This strategy provides the nursing home resident with the needed funding for care until the remaining penalty period expires, thus receiving Medicaid funding.
Promissory note: This method has a nursing home resident give half of their assets to their children or other family members, lending them the other half using a promissory note that meets Medicaid law requirements. The nursing home resident will then use the monthly loan repayments and any other available income to pay for nursing home costs during the penalty period.
Annuity: Like the promissory note, a nursing home resident gives half of their assets to their children or other family members and uses the remaining money to purchase an annuity. The majority of states do not consider an annuity purchase as a transfer that makes the buyer ineligible for Medicaid.
Remember, not all gifts will trigger Medicaid penalties. For instance, there is never a penalty for gifts given between spouses. This exemption exists because Medicaid combines both spouses’ assets when counting the assets of a spouse who applies for Medicaid long-term care. The law states there is no reason to impose a penalty on such a transfer as a gift between spouses.
There is a child caregiver exemption where an adult child enables you to delay moving into a nursing home, thus allowing the transfer of your home into their name for less than fair market value (essentially free) without resulting in a penalty. This exemption is permissible even when a senior applies for Medicaid within the five-year look-back period.
Another exception to the general rules of eligibility is the creation and funding of a trust for a child who is disabled under the rules of the Social Security Administration. No matter how large the gift, no penalty will ever be attached.
Always seek professional legal advice when creating your long-term care strategy using Medicaid. Applications are rarely successful as a do-it-yourself project, and mistakes can have devastating long-term consequences on a family and their finances. Begin early, well before you anticipate needing long-term care. Become well-informed as best you can and contact a Medicaid specialist elder law attorney to guide you through the application process. Proactive planning and creative but legal strategies can help protect your assets and still provide Medicaid funding for your long-term care.