The Complicated Medicaid Transfer Rules
As explained in this post about qualifying for Medicaid coverage of your nursing home care, you’re limited to $2,000 in countable assets (in most states) and your spouse is limited to about $130,000. So, why not qualify for Medicaid coverage of nursing home care, simply by transferring assets out of your name so your accounts total less than $2,000? Because Congress does not want you to move into a nursing home on Monday, give all your money to your children (or whomever) on Tuesday, and qualify for Medicaid on Wednesday. So it has imposed restrictions on the ability of people to transfer assets before applying for Medicaid coverage without receiving fair value in return. (Beware that there are exceptions to the Medicaid transfer rules described below.)
Calculation of the Transfer Penalty
The restrictions are in the form of a penalty for asset transfers, calculated as the period of time during which the person transferring the assets (and his or her spouse) will be ineligible for Medicaid coverage. The period of ineligibility is determined by dividing the amount transferred by what the state Medicaid agency determines to be the average private pay cost of a nursing home in your state. For example, if you live in a state where the average monthly cost of care has been determined to be $8,000, and you give away property worth $120,000, you will be ineligible for benefits for 15 months ($120,000 ÷ $8,000 = 15).
However, because of the way this transfer penalty is applied, as a practical matter, the penalty period is much longer because it does not begin until you (1) move to a nursing home, (2) spend down to the asset limit for Medicaid eligibility, and (3) apply for Medicaid coverage. The “look back” period refers to the requirement that when applying for Medicaid benefits, you must report all transfers you made during the prior five years. Here’s how this works:
April 1, 2018 Transfer $120,000
April 1, 2019 Move to nursing home
April 1, 2020 Spend down all other assets and apply for Medicaid
April 1, 2020 Beginning of 15-month transfer penalty period
July 1, 2021 End of penalty period and beginning of Medicaid coverage
As you can see, the effective penalty in this example is three years and three months from the date of the transfer, not 15 months. This would leave you with 15 months in the nursing home with no coverage and no money left to pay for your care. If you gave the money to your children and they returned it, this would eliminate the penalty period—often called a “cure”—and give you money to pay for your care. If the actual cost of the nursing home were higher than the $8,000 the state claims to be the average, you might spend down the $120,000 more quickly and become eligible for benefits sooner than July 1, 2021. However, you’d have to be very fortunate if, in 2020, your children still had the $120,000 you gave them in 2018, and they were willing to return it to you. This often leaves nursing home residents, nursing homes, and family members in conflict because the money is gone and the facility is not being paid to care for the resident. This situation can turn into an ugly lawsuit.
The Five-Year “Look Back” Period
When applying for Medicaid, you must report any transfers you or your spouse made during the prior five years. This can be a trap for unwary people who transfer large amounts. Let’s say that instead of transferring $120,000, you gave your house, worth $600,000, to your children. This would cause six years and three months of ineligibility ($600,000 ÷ $8,000 = 75). Given the timing of the transfer, entering a nursing home, and applying for Medicaid described above, if the transfer penalty began on April 1, 2020, it would not end until July 1, 2025, more than seven years after you made the transfer and more than six years after you entered the nursing home. If, instead, you waited until April 2, 2023, to apply for benefits—five years and one day after transferring the house—you would not have to report the gift and you would be immediately eligible for Medicaid coverage, two years and three months sooner than if you applied during the five-year look back period. Timing can be everything.
Other Reasons Not to Make Gifts
Bear in mind that if you give money or other property to your children, it belongs to them and you should not rely on them to hold onto it for your benefit. However well-intentioned they may be, your children could lose the funds due to bankruptcy, divorce, or a lawsuit. Any of these occurrences would jeopardize the savings you spent a lifetime accumulating. Do not give away your savings unless you are ready for these risks. In addition, transfers can affect grandchildren’s eligibility for financial aid and have bad tax consequences as well.
Moreover, the transfer of appreciated property to your children during your life can mean that they will not get a step-up in basis in the property by inheriting it from you after your death. This is especially relevant with respect to real estate and stock. Here’s how this works: Say you purchased stock for $10 a share 30 years ago and today it’s worth $100 a share. The $10 purchase price is your “basis” in the stock. If you sell the stock today, you will have capital gain of $90 a share—the difference between the basis and the selling price—on which you will have to pay taxes. If you give the stock to your children, they will have the same basis as you and have to pay the same taxes if they sell it. On the other hand, if they inherit the stock at your death, the stock’s basis gets “stepped up” to the value on your date of death. If that is $100 and your children sell the stock for $100, then there’s no gain and no tax liability.
As a rule, never transfer assets for Medicaid planning unless you keep enough funds in your name to (1) pay for any care needs you may have during the resulting period of ineligibility for Medicaid, (2) feel comfortable making the gift, and (3) have sufficient resources to maintain your present lifestyle.
Remember: You do not have to save your estate for your children. The bumper sticker that reads “I’m spending my children’s inheritance” is a perfectly appropriate approach to estate and Medicaid planning.