Medicaid’s Asset Transfer Rules
Medicaid penalizes applicants who recently transferred assets by gift. That’s because Congress does not want you to move into a nursing home on Monday, give all your money to your children (or someone else) on Tuesday, and qualify for Medicaid on Wednesday. So there are strict rules about transferring assets without receiving fair value in return.
The Gift Penalty for North Carolina Medicaid
Gifts create a penalty period, delaying Medicaid benefits. During the penalty period, the person who transferred assets will be ineligible for help from Medicaid. Medicaid calculates the penalty period by dividing the amount transferred by the penalty divisor. The penalty divisor is the number Medicaid says is the average private pay cost of a nursing home in your state. The penalty divisor varies by state. This number generally increases over time, but not as quickly as nursing home costs increase.
In 2014 the penalty divisor for North Carolina is $6,300. That means Medicaid imposes a penalty of one month for every $6,300 of gifts made within the look-back period. The look-back period for Medicaid is 5 years. Medicaid totals gifts made during the 5 years before the Medicaid application, divides the total gifts by the penalty divisor, and the result is the number of months that the applicant will be ineligible for benefits.
Example: For example, in North Carolina the average monthly cost of care has been determined to be $6,300. If you give away property worth $63,000 to your child, you will be ineligible for Medicaid nursing home benefits for 10 months ($63,000 / $6,300 = 10).
As a result, for every $6,300 transferred, an applicant is ineligible for Medicaid nursing home benefits for one month. In theory, there is no limit on the number of months a person can be ineligible.
Example: The period of ineligibility for the transfer of property worth $630,000 would be 100 months ($630,000 / $6,300 = 100).
So how does Medicaid know about these gifts? The Medicaid rules require the applicant to provide detailed financial information for the disclose all financial transactions he or she was involved in during a set period of time called the “look-back period.” Any gifts made, or other transfers for less than fair value, must be disclosed.
The Deficit Reduction Act of 2005 (DRA) made two important changes for how gifts made after November 1, 2007 are treated in North Carolina. First, the look-back period was increased from 3 years to 6 years. Since it’s been more than 5 years since that change was made, all gifts are now evaluated using the 5-year look-back period for current applications.
The even bigger change made by DRA was that the penalty period created by the transfer begins later. In effect, a gift made years ago, even a relatively small gift, continues to have an effect for a full 5 years. Under prior law (i.e., before November 1, 2007), in the example described above the 10-month penalty period created by a transfer of $63,000 would start to run when the gift was made. As a result, the penalty would have expired after 10 months, and if you applied for Medicaid 11 months after the gift under the old rules the gift penalty had no effect. But under the current rules (after the DRA), the penalty period continues to “haunt” the family for a full five years. For our example of gifting $63,000, that means if you apply for Medicaid anytime within the 5 years after making the gift, there will be a full 10-month penalty starting from the date of the application. That’s because under the DRA rules, the Medicaid gifting penalty begins to run only after the person making the transfer has (1) moved to a nursing home, (2) spent down to the asset limit for Medicaid eligibility (generally that asset limit is $2,000 of countable assets), (3) applied for Medicaid coverage, and (4) been approved for Medicaid coverage “but for” the transfer.
Example: If you transferred a home worth $126,000 on June 1, 2012, move to a nursing home on June 1, 2013, and pay privately for a year until you’re nearly out of money (your only asset is less than $2,000 in the bank), and then apply for Medicaid and are approved on June 1, 2014, that is when the 20-month penalty period will begin. Medicaid would set a penalty of 20 months, which would last until , and it will not end until February 1, 2017!
As you can see, the penalty period for nursing home Medicaid benefits does not begin until the nursing home resident is out of funds. That means there would be no money to pay the nursing home until the penalty ends. (In states such as Pennsylvania that have so-called “filial responsibility laws,” nursing homes may seek reimbursement from the residents’ children. These laws are rarely enforced laws, allow states to sue adult children to make them financially responsible supporting an indigent parent and, in some cases, medical and nursing home costs. In 2012, a Pennsylvania appeals court found a son liable for his mother’s $93,000 nursing home bill under the state’s filial responsibility law.
Exceptions to the Gifting Penalty
There are some exceptions to the gifting penalty. Gifts to certain recipients will not trigger a period of Medicaid ineligibility, including gifts to the following:
- The applicant’s spouse
- The blind or disabled child of the applicant (for this purpose, disability needs to be determined based on the standards for Social Security Disability)
- Certain types of trusts for the benefit of a blind or disabled child
- A trust for the sole benefit of a disabled individual under age 65
If there is a gift of the home, Medicaid exempts two additional types of transfers. In other words, Medicaid will not penalize a transfer that falls under the one of the four exemptions stated above. In addition, Medicaid allows the applicant to transfer his or her home without incurring a transfer penalty, to the following individuals:
- A sibling who lived in the home during the year preceding the applicant’s institutionalization and who already owns an equity interest in the home, i.e., the sibling co-owns the home already.
- A “caretaker child” of the applicant, who lived in the applicant’s home for at least two years prior to the applicant’s institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay. This exception depends on the Medicaid office’s determination of whether the recipient met all of the definitions of being a “caretaker child.” Be careful and get assistance in making certain that you qualify for this exception before intending to rely on it.
“Curing” a Penalty
If a person made a past gift, but now needs to qualify for Medicaid, then the penalty can be reduced or eliminated. Essentially a penalty can be completely “cured” (that is, the penalty is eliminated altogether) if the transferred asset is returned in its entirety. Or there can be a partial “cure” (meaning the penalty is reduced), if the transferred asset is partially returned before the Medicaid application. There are some traps for the unwary however, for gifts returned after the Medicaid application has been made. Check with your elder law attorney.