Medicaid Planning That Won't Work: Asset Transfers That Incur a Medicare Penalty

Recent Medicaid laws have made some Medicaid planning strategies obsolete.

By , Attorney Washburn University School of Law

Medicaid will pay for nursing home care only for those with limited assets and will penalize those who give away assets to qualify for Medicaid. People anticipating needing long-term care have come up with ingenious ways to try to get around the rules penalizing gifts of assets. Here we discuss some of the ways people used to be able to make gifts while avoiding a transfer penalty. You should be aware that, unfortunately, these techniques no longer work.

Half a Loaf Strategy

This used to be one of the most popular gifting strategies. A senior who anticipated needing long-term care would gift half of his assets to his heirs (preserving "half a loaf"), and use the rest to pay for Medicaid during the penalty period.

To gain a better understanding of this strategy, you may want to read our article describing how Medicaid transfer penalties are calculated. The key to this strategy was to exploit the prior method of calculating a transfer penalty (before the Deficit Reduction Act (DRA) in 2006). Under the prior law:

  • Transfer penalties began either the month a gift was made, or in some states, the following month, rather then when the person applies for Medicaid, and
  • Calculated penalties were rounded down so that the penalty period was shorter.

Using the half a loaf strategy, individuals often made gifts to family members every month or every other month, depending upon state law. But now that the transfer penalty does not begin to run until a person applies for Medicaid and all of the other qualifications are met for Medicaid, periodic gifting will no longer work.


The strategy of purchasing an annuity to qualify for Medicaid still works for married couples, but there has been refinement in the law, making some of the older methods ineffective. (An annuity is when someone pays a lump sum of cash in exchange for a series of guaranteed future payments during that person's lifetime.)

The key to making this a successful strategy is that it converts an asset into a stream of monthly income for the spouse who does not need long-term care. This works because only the income of the applicant is considered toward eligibility; income of the healthy spouse (called the "community spouse") is excluded. Purchasing a annuity turns an excess asset into income, so the asset "disappears" for Medicaid purposes.

To be acceptable to Medicaid, the annuity payments must be completed before the end of the community spouse's life expectancy. This rule prevents the likelihood that there would be annuity payments left for the heirs after the community spouse's death. Here is an example of how this works.


Steve, a married applicant, applies for Medicaid, but in order to qualify, he must "spend-down" $100,000 in resources above the Medicaid limit. Karen, Steve's wife, purchases an annuity from XYZ Financial for $100,000. In return, XYZ Financial agrees to pay this money back to Karen during her life expectancy. (Remember, the $100,000 must be returned to Karen during a period less than her life expectancy.) Using life expectancy tables from Social Security, Karen has a life expectancy of 8.7 years, so the annuity is set up to pay back the money before the end of 8.7 years.

The pre-2006 rules required only that the annuity be immediate and "actuarially sound" (based on life expectancy). There was no requirement that the annuity be purchased commercially, so private annuities were acceptable. This allowed for an annuity contract to be drawn up between family members that met the requirements. If the Medicaid applicant died earlier than expected, the family member would benefit by not having to pay the money back.

The pre-2006 rules also did not require that the money be paid back in substantially equal monthly payments, so in the example above, Karen could ask XYZ Financial to pay her interest only for eight years, followed by a balloon payment of the remainder in a single lump-sum payment. This technique helped to preserve the $100,000 for her heirs (because Karen might have passed on by then, leaving the entire $100,000 for beneficiaries).

Medicaid is wiser now, and anyone using these strategy will be disqualified from receiving Medicaid benefits. Those who purchase annuities must now meet these rules to qualify for Medicaid.

  • The annuity must pay back in substantially equal monthly payments.
  • The state of residence must be designated as the primary beneficiary of the annuity, so that the state can recover payments made by Medicaid following the death of the owner/spouse.
  • The annuity must be purchased from a commercial insurance company.

In addition, some states have added additional rules, such as requiring the annuity term to be significantly shorter than the purchaser's life expectancy.

For more information, see our article on properly using annuities for Medicaid planning.

Life Estates

Most people are not familiar with the term "life estate." Basically, a life estate is a right to live in a home for the remainder of a person's life. When someone buys a life estate, they purchase this right to live in a home until death. The purchase price is based upon the value of the home and the age of the purchaser.

As a Medicaid strategy, the purchase of a life estate was designed to exploit the definition of a gift, which is defined as a transfer for less than what the item is worth. With this strategy, an applicant for Medicaid "purchased" a right to live in the home of a child or other family member. The Medicaid applicant paid a sum to the child or family member for this right, based on the value of the life estate. The only problem is that there was no requirement that the applicant actually live in the home! The net result was that this loophole basically allowed for a gift of money to a family member and imposed no responsibility on the applicant to actually live in the home. This was a perfect way to transfer money to family and protect it from any penalties imposed by Medicaid.

The law has now changed. Medicaid now requires that the applicant actually live in the home where the life estate has been purchased. This new rule insures that the applicant actually receive the benefit of what has been purchased.

As with annuities, Medicaid wants to make sure that if a Medicaid applicant gives something away, that person receives something of equal value during his or her lifetime.

Acceptable Asset Transfers

While spending or giving away money in the above ways will make you ineligible for Medicaid for a period of time, there are several types of asset transfers that won't disqualify you from getting Medicaid coverage for long-term care. For more information, read Nolo's article on asset transfers that are acceptable to Medicaid.

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