Compliments of Our Law Firm,
Written By: The American Academy of Estate Planning Attorneys
At some point during your retirement years, there is a very good chance you (or your spouse, and perhaps both of you) will need long-term care. There is also a chance that you will need to qualify for Medicaid benefits in order to cover the high cost of that care. Qualifying for Medicaid can be a complicated process due to the complex eligibility rules. The asset transfer rules, in particular, are a source of much confusion for applicants. While it is always best to consult with an experienced elder law attorney if you foresee the need to qualify for Medicaid, you may also benefit from knowing the answers to some basic questions regarding Medicaid eligibility, asset transfers, and gifts.
Can an applicant transfer assets to an adult child in anticipation of the need to qualify for Medicaid?
Generally, no, not without incurring a penalty. Medicaid uses a five-year “look-back” period when determining an applicant’s eligibility. The “look-back” provision allows Medicaid to review an applicant’s finances for the five-year period prior to applying for benefits. Asset transfers made during that time period for less than fair market value will be flagged and the total value of the gifts made during that time period, in turn, will cause the applicant to incur a penalty period before receiving benefits, even though the applicant is otherwise eligible.
Are gifts of up to $14,000 per year excluded from the Medicaid transfer rules?
No. This is a common source of confusion. The $14,000 per year figure refers to the I.R.S. annual exclusion rule that allows a taxpayer to make gifts valued at up to $14,000 per year to an individual beneficiary without having to file a gift tax return documenting such gift(s). Such gifts would, however, incur a transfer penalty under the Medicaid asset transfer rules, which are completely unrelated to the I.R.S. rules.
How are asset transfer penalties calculated?
In North Carolina, after the total value of gifts during the five-year look-back period have been determined, that value is divided by the “penalty divisor” for our state, namely $6,300 in North Carolina, which is deemed under the rules to be the average cost of a month of nursing home care in our state. Penalties are calculated by dividing the value of the total amount transferred by the penalty divisor, resulting in a period of months for which benefits are withheld. For example, if you made a gift of your vacation house valued at $126,000 to your daughter, you would incur a penalty of about 20 months (namely, $126,000/$6,300). Keep in mind that the penalty divisor is subject to change as the cost of nursing home care changes.
Can my mother just give me all of her assets to hold and tell Medicaid she has no assets?
Absolutely not. Whether your mother calls it a “gift” or not, Medicaid will consider it an asset transfer, and failure to report asset transfers constitutes Medicaid fraud. Moreover, the gift would incur a penalty period during which your mother would not be entitled to benefits. If she accepted benefits anyway during that time period, she could be required to repay them. The bottom line is that there is no easy way around the Medicaid asset transfer rules nor the five-year “look-back” period.
Since my mother’s house is considered an exempt asset by Medicaid, can she give me the house without incurring a penalty?
Maybe. The fact that the asset is an exempt asset for Medicaid eligibility purposes is not sufficient to avoid a penalty. In North Carolina, all asset transfers while receiving Medicaid are potentially subject to a penalty, even if the asset transferred is exempt. There are, however, certain transfers that may not incur the penalty. Your mother may be able to transfer her house, without incurring a penalty, to the following people:
- Her spouse
- Her child who is blind or permanently disabled
- A trust for the sole benefit of anyone under age 65 and permanently disabled
- Her child who is under age 21
- Her child who has lived in her home for at least two years prior to your mother moving to a nursing home and who provided your mother with care that allowed her to stay at home during that time.
- A sibling who already has an equity interest in the house and who lived there for at least a year before your mother moved to a nursing home.
The best way to avoid penalties is to include Medicaid planning in your estate plan well before you enter the five-year “look-back” period. Since that is not always possible, the next best thing is to make sure you consult an experienced elder law attorney before you apply for Medicaid, and certainly before you make any asset transfers. Your attorney can help you develop a gifting strategy that will minimize any potential penalties you might incur.