Anyone who gifted assets within five years of applying for Medicaid may be subject to a penalty period, but that penalty can be reduced or eliminated if the assets are returned.
In order 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 be ineligible for Medicaid. In Illinois, the penalty period is determined by dividing the amount transferred by what Medicaid determines to be the private pay cost of the nursing home in which the applicant is residing. The penalty will be "cured" if the transferred asset is returned in its entirety. Returning the funds will likely mean that the Medicaid applicant will have excess resources that will need to be spent down before the applicant will qualify for Medicaid. Often, though, the recipients of the previously transferred assets will have spent the gifted assets and no longer have any money to return, which will likely be problematic for the Medicaid applicant.
When assets have been transferred within the five years of applying for Medicaid, there may be strategies available to mitigate the consequences. Typically, though, such strategies require the applicant to still have other resources available to them. With proper planning, it may be possible to convert the remaining assets / resources into to an income stream (without triggering an additional penalty for the conversion to the income stream).
The bottom line is that transfers within five years of applying for Medicaid can have dire consequences for the applicant. Thus, meeting with an elder law attorney to help navigate Medicaid’s complicated rules and application process, prior to applying for Medicaid and, ideally, before the applicant exhausts their remaining resources, is strongly recommended.