By Keith Lyman
Because one must meet strict asset limits to qualify for Medicaid, some seniors headed for a nursing home in the future try to give away their assets in order to qualify for Medicaid. But Medicaid frowns on people who give away assets that could have been used to pay for their own care.
Here’s how this works: Individuals anticipate that they may need assistance paying for long-term care, and they don’t want to lose any of their assets just to get Medicaid benefits. So they decide to give away some of their assets to someone, usually a family member, to reduce the value of their estate. They probably heard of other people doing that and ending up on Medicaid, so it should work for them, right?
Wrong. Medicaid is a “payer of last resort” and requires that all other sources of payment be exhausted before Medicaid will pay for long-term care expenses. With a few exceptions, if you give away assets, you will be ineligible to receive Medicaid benefits for long-term care for a period of time after applying for Medicaid. In most states, including California and New York, this period of ineligibility does not apply to Medicaid-paid home care, but only to nursing and assisted living facilities. (Call your local department of health services to find out if the penalty applies to home health care or other community-based health care services in your state.)
The Deficit Reduction Act of 2005 (DRA) imposed a period of ineligibility on those who gave away assets within five years of applying for Medicaid benefits. What is most powerful about this ineligibility period is that it begins when the individual applies for Medicaid (and would otherwise qualify for Medicaid but for the gift).
For example, if a Medicaid applicant in need of a nursing home made a gift of $11,000 4 ½ years prior to the Medicaid application, Medicaid would enact a period of ineligibility starting when the application for Medicaid is made, not when the gift or transfer was made.
The length of the period of ineligibility, also called the penalty period, depends on the amount gifted or transferred. Medicaid divides the amount transferred by the average monthly cost of nursing home care in your area to come up with the penalty period. For example, if you transferred a house worth $500,000 in an area where the average cost for a nursing home was $10,000, the penalty period would be 50 months.
As mentioned at the beginning of this article, there are some exceptions to the imposition of a period of ineligibility when a gift is made.
Certain assets are exempt from being counted as assets for Medicaid eligibility. One exception to the Medicaid transfer penalty where no ineligibility period is imposed applies to gifts of exempt assets. An example would be the gift of an exempt automobile or a gift of certain household goods and furnishings.
Also, gifts made to certain people may not trigger the ineligibility period. This includes gifts to a spouse, a disabled child, or in some cases, giving a house to a child who resided in the home for two years prior to application for Medicaid and whose presence allowed the applicant to remain at home. (For more information, see our article on exceptions to the Medicaid transfer rules.)
However, in most cases, you will be on your own to pay for your long-term care needs if you made a gift within five years of applying for Medicaid, so the best practice is to avoid making gifts if you think you may need nursing home care within five years. If you want to save your house or other assets for your children or other relatives to inherit, talk to an elder law attorney about what you can do.
Prior to the enactment of the Deficit Reduction Act of 2005 (DRA), the rules were much more lenient. We discuss them briefly here in case you've read about them and may think they are still in effect. (And note that while the DRA was implemented in some states in 2006, in other states it took longer.)
Before the DRA, the period of time when Medicaid would look back to see if a gift was made was three years prior to the date of application (except gifts to certain trusts, for which the look back period was five years). If a gift was made 3 ½ years prior to the application, it would not affect the eligibility of the applicant.
Also, when assets were given away, the period of ineligibility began from the time of the gift or transfer, not from when the applicant applies for Medicaid. The transfer penalty disqualified the person from receiving long-term care benefits from Medicaid for as long as those funds could have been used to pay for care. That period of time was calculated using the private pay rate, which varies from state to state. So, for example, if the private pay rate was $6,000, and the person gifted $6,000, there would have been a period of one month where the person was not eligible for Medicaid.
Furthermore, when calculating the ineligibility period, the rules required “rounding down”, which meant that a gift of $11,000 with a private pay rate of $6,000 would also result in only one month ineligibility, because 11,000/6,000 = 1.83, rounded down to 1 month. And, a gift of $5,900 would have resulted in no ineligibility period, because 5,900/6,000 = .98, rounded down to zero.
After the DRA was passed, states no longer “round down,” so an ineligibility period of 1.83 months would not be reduced to one month. And there may now be a partial month ineligibility period, so a period of ineligibility of .98 would not be reduced to zero.