Medicaid is a partnership between the state and federal governments to provide medical benefit assistance to people, including those over age 65, who have financial need.
In order to be considered to have financial need, when you go into a nursing home and go on Medicaid, you cannot have more than $2,000 (in most states) in “available” resources. Some resources don’t count, such as the car used for your medical transportation. Also, assets that cannot be used for your benefit, such as in an irrevocable trust, typically don’t count either.
A prior post set forth the reasons giving assets to an irrevocable trust is a better strategy than giving outright. But, it’s important to keep in mind that uncompensated transfers, whether outright or to an irrevocable trust, can generate a penalty period. This article will examine when there’s a penalty and how it works.
If you give away assets during the “lookback period” there’s a penalty period. The lookback period typically is five years (60 months) from the date on which you apply for Medicaid and are “otherwise eligible.” Otherwise eligible means that you have a medical need and are financially eligible. So, let’s look at an example: Mary is medically in need of going into a nursing home. She only has $2,000 in available resources, such as her checking account. In other words, she’s “otherwise eligible” and is applying for Medicaid. When Mary applies for Medicaid, they’re going to ask her about any uncompensated transfers she made within the “lookback period,” which in almost every state is 5 years. If Mary didn’t have any uncompensated transfers to report, she’d be good to go.
But, what if Mary had made an uncompensated transfer during the lookback period? In that case, Medicaid wouldn’t kick in until the penalty period passes. The penalty period is the amount of the uncompensated transfers in the lookback period, divided by the Average Private Pay Rate (“APPR”) for her area (typically the state but sometimes the county or local area). Mary had made $150,000 in uncompensated transfers in the lookback period. The APPR in her area is $10,000. So, she has a 15-month penalty period.
So, once Mary is otherwise eligible and applies for Medicaid, she’ll have a 15-month period during which Medicaid won’t pay for her care. She’d have to pay for her own care during that period. But how can she do that if she only has $2,000 in available resources? Typically, she’d use exempt resources such as her home equity or she’d have her family pay for her care during that time. If she didn’t have family willing to pay or any exempt resources, she could find herself in a real bind.
That is the reason it’s important to do gifting early so that you maximize the chances of having it done outside of the lookback period. None of us know when we might need medical assistance. Therefore, it’s best to start your Medicaid planning as early as possible.
Gifting, including to a Medicaid trust, can be a great tool to allow you to protect some assets and still qualify for Medicaid.