To be eligible for Medicaid, you cannot have recently transferred assets. 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 a penalty on people who transfer assets without receiving fair value in return.
This penalty is a period of time during which the person transferring the assets will not be eligible for Medicaid.
How Is the Penalty Period Determined?
To calculate the length of the penalty period, Medicaid will first look at the amount transferred. It will then divide that amount by the monthly cost for a nursing home in your state.
For example, perhaps you live in a state where the average monthly cost for private nursing home care is $5,000. If you give away property worth $100,000, you will not be eligible for benefits for 20 months ($100,000 / $5,000 = 20).
In other words, for every $5,000 transferred, you would not be eligible for Medicaid nursing home benefits for one month. In theory, there is no limit on the number of months a person can be ineligible. As another example, the period of ineligibility for the transfer of property worth $400,000 would be 80 months ($400,000 / $5,000 = 80).
A Medicaid applicant must disclose all financial transactions in which they were involved during a set period of time. This is frequently called the Medicaid "look-back period." The Medicaid agency in the applicant’s state then determines whether the applicant transferred any assets for less than fair market value during this period.
The look-back period for all transfers is 60 months (except in California, where it is 30 months). Remember that because the Medicaid program is administered by the states, your state's transfer rules may diverge from the national norm.
The penalty period created by a transfer within the look-back period does not begin until the person making the transfer has:
- moved to a nursing home,
- spent down to the asset limit for Medicaid eligibility,
- applied for Medicaid coverage, and
- been approved for coverage but for the transfer.
For instance, if an individual transfers $100,000 on April 1, 2021, moves to a nursing home on April 1, 2022, and spends down to Medicaid eligibility on April 1, 2023, that is when the 20-month penalty period will begin, and it will not end until December 1, 2024.
The penalty period would not start until the nursing home resident ran out of money. This means there would be no money to pay the nursing home for the duration of the penalty period.
In states that have so-called "filial responsibility laws," nursing homes may seek reimbursement from a resident’s children. These rarely enforced laws, which exist in 30 states, hold adult children responsible for financially supporting their impoverished parents.
In some cases, they are also responsible for their parents’ medical and nursing home costs. In one 2012 court case, a son had to pay for his mother's $93,000 nursing home bill. (His state had a filial responsibility law.)
Note that transferring assets to certain recipients will not trigger a penalty period. These exempt recipients include the following:
- A spouse (or a transfer to anyone else as long as it is for the spouse's benefit)
- A trust for the sole benefit of a blind or disabled child
- A trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances).
In addition, special exceptions apply to the transfer of a home. A Medicaid applicant may transfer their home to the individuals above, or to the following individuals, without incurring a transfer penalty:
- A child who is under age 21
- A child who is blind or disabled (the house does not have to be in a trust)
- A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home
- A "caretaker child." This is defined as a child of the applicant:
- who lived in the house 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.
Note that Congress has created a particularly important escape hatch from the transfer penalty. The penalty will be "cured" if the transferred asset is returned in its entirety. Or it will be reduced if the transferred asset is partially returned. However, some states do not permit partial returns.
Check with your elder law attorney on the laws in your state; find a qualified attorney near you.