Many, if not the majority of residents of nursing homes, receive assistance from Medicaid. When making decisions for yourself or a loved one regarding nursing home care or senior living care, it is important to take into consideration Medicaid’s look-back period to reduce the chance of imposed financial or care coverage penalties.
Overview of Medicaid
Medicaid is a federal program, but is administered by the states. It was originally created in the 1960s to provide benefits for health and long- term skilled care services to qualifying individuals, including those who are elderly, blind or disabled. Although Medicaid has become a very large and complex program with an annual budget well in excess of $632 billion, a significant portion of those expenditures provide coverage for long-term skilled care (LTC) for seniors, such as nursing home care. It is this aspect of the Medicaid program which is of particular concern in the context of estate planning.
When a person applies for Medicaid for LTC, the applicant must show an inability to pay for the care which is needed. The applicant must establish both that his or her income is insufficient to pay for the on-going cost of care, and also that his or her assets have been depleted to an amount below the maximum threshold to show financial need under government rules. For example, a single person’s maximum asset threshold is $2,000. For married persons, the income and assets of both spouses are considered together for purposes of eligibility, and the spouse who is not a Medicaid recipient will have separate rules for what income or assets he or she may retain. However, as to the spouse who is a Medicaid recipient, the same asset threshold of $2,000 applies, same as would be the case with an applicant who is single.
How the Medicaid Look-Back Period Works
If a potential Medicaid applicant, and/or the applicant’s spouse, have assets above the asset threshold amount, they can be spent in whatever manner desired (i.e., money can be expended for living expenses, or to pay debts, make purchases, etc.), but the rules prohibit making gifts or partial gifts. The intent is to prohibit the applicant from "giving everything away" at the last minute in order to meet the asset threshold test and qualify for Medicaid.
More specifically, Medicaid law does this by imposing a penalty for "divestment," which can be defined as transferring anything of value to someone else without receiving something of equal fair market value in return. In practical terms, a person applying for LTC Medicaid is asked on the application whether he or she has made any divestments within a certain prescribed period before the date of the application. The period covered by that inquiry is referred to as the "look-back period," and is now 60 months (5 years) in every state except California (where it remains at 30 months). The purpose of the look-back period is to prevent individuals who could otherwise afford to pay for their own care from sheltering and protecting assets from inspection.
The penalty for divestment is the imposition of a "penalty period." In other words, an applicant who is otherwise eligible for benefits will be denied eligibility for a period determined by dividing the amount of the divestment by the Medicaid cost of care. So, for example, if the divested amount was $24,000 and the Medicaid cost of care was $8,000 per month, a penalty period of $24,000 divided by $8,000 per month, or 3 months, would apply. The penalty period would be imposed after the person applied for LTC Medicaid and was otherwise eligible (including having insufficient income to pay for the cost of the care they need and having less than $2,000 in remaining assets). Beginning at that time, the penalty period of three months would be imposed, during which the person would be ineligible for benefits. In effect, the penalty period treats the applicant, for purposes of eligibility, as if he or she still owned the divested assets, even though he or she does not.
How to Avoid Medicaid Look-Back Penalties
Planning ahead and being aware of exemptions is the best practice for avoiding Medicaid look-back penalties and receiving help with long-term care. When applying for Medicaid, it is up to the applicant to prove that any divestments or transfers were not made simply to qualify for the program. These can include any financial gifts regardless of size and can include any loans to family or friends.
Some exemptions to be aware of that can help avoid triggering any penalties are: transfers to a spouse, a disabled person under the age of 65, or a blind or disabled child. If made to a qualifying person, a home residence can also be transferred. This person could be a minor child, a child who is disabled or blind, or a caretaker child who lived in the home with the applicant (for at least two years) and took care of the applicant before entering a nursing home.
The Medicaid look-back period
is an important factor that needs to be included in any estate planning to
avoid penalties in qualifying to receive long-term care. Consider talking with
an estate planning attorney to properly understand how your Medicaid planning
should work with your overall estate planning goals.