The Medicaid ineligibility trap
Because of the potentially financially devastating costs of long term care, Medicaid is often the safety net to protect spouses and other family members from impoverishment. For those of you who transfer assets, there is a period during which you are ineligible for Medicaid. The period of ineligibility was created by Congress. The “look-back” period is 60 months.
Although the look-back period governs which transfers will be penalized, the length of the penalty period is dependent on the amount transferred. If you divide the amount transferred by the average monthly cost of nursing home care, the result is the penalty period. For example, if the nursing home resident conveyed $100,000 in a state in which the average monthly cost of care was $8,000, the penalty time frame would be ($100,000/$8,000), or 12.5 months. The 12.5-month period begins when (1) the person making the transfer moves to a nursing home, or medically qualifies for home and community based services covered by Medicaid, (2) he or she has spent down assets to the limit in order to be eligible for Medicaid, (3) the transferor has submitted an application for Medicaid coverage, and (4) has received notification of approval for coverage with the exception of the transfer.
Thus, if you transfer $100,000 on February 1, 2016, move to a nursing home on February 1, 2017, and spend down your assets to the limit required in order to be eligible for Medicaid on February 1, 2018, that is the date on which the 12.5-month penalty period will start, and it will end in February 2019. Those of you who make transfers should exercise caution when applying for Medicaid, and make certain that you do not submit an application for Medicaid before the five-year look-back period elapses without seeking counsel from an elder law attorney. The reason is that the penalty could extend beyond five years, depending on the size of the transfer.
You must be extremely careful prior to making transfers. A transfer strategy must consider the nursing home resident’s income and expenses, including the nursing home cost. You should also be mindful of the fact that if you give money to your children, you should not depend on them to keep the money for your benefit. The funds could be depleted as a result of bankruptcy, divorce, medical expense, death or lawsuit.
Moreover, it is important to be cognizant of the fact that your children’s retention of the funds in their names could imperil your grandchildren’s qualification for financial aid in college. Additionally, for assets that have increased in value, such as real estate and stocks, if you make such gifts to your children, they will not receive the tax benefits that they would if they were to receive them by way of your estate. Upon selling the property, they will be required to pay a significantly higher capital gains tax than they would have if they had acquired the asset through inheritance.
You should never make transfers of assets for the purpose of Medicaid planning unless you have sufficient funds in your name to pay for any care needs you might have during the Medicaid ineligibility period, and you feel comfortable and possess enough resources to continue your current standard of living.