Since long-term care Medicaid (which helps pay some or all of a Medicaid applicant’s nursing home and drug costs) is “means-tested” (the government looks at the amount of assets and type of assets owned by the applicant), there are transfer penalty rules creating a certain period of ineligibility for transfers made within five years of the Medicaid application as the government assumes transfers were purposefully made so that the government would help pay for long-term care costs. The period of ineligibility is determined by dividing the uncompensated transfer by the average daily rate of a Texas nursing home (presently $172.65). If ineligible, the applicant must pay at the private pay rate until the transfer penalty expires.
For example, if an applicant transfers $14,000 (the annual gift tax exclusion – which has nothing to do with the Medicaid rules and is still a penalized transfer) within five years of applying for Medicaid, and being otherwise eligible for Medicaid, the applicant would have to private pay for 81 days ($14,000/$172.65) from the first day of a month in which there would otherwise be eligibility.
However, there are several exceptions to the rule including the following:
- Transfers to a spouse. Since Medicaid looks at the countable resources (even if separate property) of the married couple, there is no penalty in transferring resources from one spouse to the other. Furthermore, Medicaid eligibility would be lost if countable resources are not transferred from the institutionalized spouse to the community spouse within one year as the institutionalized spouse has one year to get down to less than $2,000.
- Transfers to the applicant’s disabled child no matter what the age is for the disabled child. Disability must meet the Social Security Administration’s disability criteria. Caveat: if the transfer is made to a disabled child who is on a Medicaid program, eligibility for the disabled child could be lost. Thus, usually transfers are made to a disabled child who is on Social Security Disability (which is not “means-tested”) instead of a disabled child on a Medicaid program.
- Transfers to a trust for the “sole benefit” of a disabled child of the applicant. There is no age limit for the disabled child since the rules that distributions be “actuarially sound” based on the life expectancy of the disabled child. Since Medicaid programs look at the applicant or recipient’s income, these trusts are usually used when the disabled child is on Social Security Disability (which only is concerned about earned income) and not on a Medicaid program.
- Transfers to a trust for the sole benefit of any disabled person (not just the applicant’s disabled child) under age 65. Again, usually used if the beneficiary is on Social Security Disability.
- Applicant intended to transfer property for fair market value.
- Satisfactory evidence that the transfer was made for a purpose other than to qualify for Medicaid. For example, if a person had a history of tithing, then that is likely to have been done for purposes other than to qualify for Medicaid.
- Imposition of a penalty would cause an undue hardship. An example is if someone defrauds an applicant and takes their funds and no one can take care of the applicant resulting in endangering the applicant.
- Applicant changes a joint bank account to establish separate accounts to reflect correct ownership and access to funds.
- An applicant purchases an irrevocable funeral arrangement or assigns ownership of an irrevocable funeral arrangement to a third party and the funeral arrangement is for the applicant’s benefit or for the benefit of their spouse. The logic for this is the government doesn’t want to pay for a burial (and the government often pays for burial of those without adequate assets).
- Transfers to an UTMA (Uniform Transfers to Minors Account). This is a benefit for a child or grandchild of the Medicaid applicant under age 21. Texas encourages higher education for a child or grandchild.
There are also at least six different ways for an applicant to transfer their home that are exceptions to the transfer penalty rules.