When making a Medicaid application, the Medicaid application will ask if the Medicaid applicant has made any prior gifts. Such gifts could result in a denial for Medicaid benefits (particularly long-term care benefits) if gifts have been made within the Five Year Look Back Period. The rules are, however, a bit more complex than the simple Five Year rule.
The Medicaid program is a means-tested assistance program, i.e. Medicaid benefits are granted only if the Medicaid applicant’s countable assets are under the Medicaid asset limit. For Medicaid applicants above the asset limit, the typical path is for the person in need to spend down their assets until they are under the applicable Medicaid limit (in Missouri, the current Medicaid asset limit is $6,200).
The ability to make asset transfers in order for a Medicaid applicant below the applicable limit is limited. The Medicaid application will ask for details regarding any gifts or asset transfers made before the Medicaid application was filed. Specifically, Medicaid will ask for details regarding any gifts made within five years of the Medicaid application. This is known as the Five Years Look Back Rule. It is important to keep in mind that this gift prohibition only applies to applications for long-term care or nursing home Medicaid, and not to Medicaid applications for health care coverage for medical bills.
If any gifts have been made within that period, and the applicant is applying for payment for nursing home care, Medicaid will divide the gift by the state’s Penalty Divisor. In Missouri, for example, the current Medicaid Penalty Divisor is currently $8,235. The fair market value of the gifted assets made as a gift will be divided by this amount. The product of that calculation, the Transfer Penalty, will be the period of ineligibility in months that the applicant must wait before Medicaid eligibility will begin.
And what constitutes a gift for Medicaid purposes? A gift is a transfer out of the prospective applicant’s name of any asset holding value (not just gifting money and even Medicaid exempt assets) with no payment for that asset by the recipient, OR FOR LESS THAN FAIR MARKET VALUE. Medicaid will ask for documentation regarding any transfer that might fall into this category and could therefore possibly result in a penalty period.
And what about the gift tax rule that allows a person to transfer up to $19,000 per year per recipient under the annual gift tax exclusion? This rule only applies to the Internal Revenue Service’s regulations regarding gift tax payment on gifts under a gift tax return.
These strict Medicaid regulations make early Medicaid planning vital if the family is hoping to preserve funds. Obviously, long-term care planning more than five years before the need for Medicaid is very common, usually through the use of irrevocable trusts. But there are other exceptions that can apply and can be employed through modified estate planning. Trusts for disabled children (special needs trusts) can be established within the 5 year window (the Disabled Child Exception). Other exceptions apply.
Finally, if a gift was made within the Five Year window, but was in no way made for Medicaid planning purposes, and the resulting penalty would result in an egregious penalty, an application for an Undue Hardship Waiver can be filed. It is difficult to qualify, but it can be done in very dire circumstances.
QMC can walk you through all of your gifting options and help you preserve all assets possible.
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