When NOT to file a Medicaid application

There is a subtle but important distinction between the Medicaid look-back rule and the ineligibility rule while the look-back period is limited to five years, the ineligibility period is not.

Think about that.

If you file a Medicaid application, the state asks you to reveal any transfers of assets in the past five years. Any transfers made before that won’t count. So you might think that any transfers you have made shouldn’t make you ineligible for benefits beyond five years. But here is the tricky thing: the ineligibility period is unlimited.

Here is an example of how these two rules work.

Madge has modest means, but the vacation house her father left to her has greatly increased in value over the years. In February of 2007, when the property was appraised at $650,000, she transferred title to her three children. Since she spent every summer there with her children when they were young, Madge wanted to keep it in the family.

Now in January of 2012 she enters a nursing home. The value of her assets is such that she could qualify for Medicaid benefits to pay for her care in a month or two.

Her nursing home has a policy of routinely filing an application for every new resident that transfers from a hospital, as Madge did. The nursing home, understandably, wants to make sure that every resident who qualifies for benefits gets approved as soon as possible so that the nursing home can continue to get paid.

But look at Question 10 on the Pennsylvania’s Medicaid application:

Within the past 60 months, have you or your spouse closed, given away, sold or transferred any assets such as: a home, land, personal property, life insurance policies, annuities, bank accounts, certificates of deposit, stocks, IRA, bonds or a right to income?

If her application is filed in January, Madge must answer “yes” and list the transfer of title to her children.

The result? The state finds Madge ineligible for Medicaid benefits for 80 months, or more than 6 ½ years! (The ineligibility period comes from a formula based on the value of the property transferred: $650,000 ÷ $8,112.13 = 80.13.) Madge may have to have her children transfer the house back to her, sell it, and spend down much of the proceeds.

The sad part is that Madge wasn’t even eligible for benefits until March. Had she waited until then to file her application, the transfer of title to her children would not have counted because it would have occurred more than five years before.

So if you have made sizeable transfers of your assets, be careful about when you file a Medicaid application. Better planning can help you achieve your estate planning goals.

How to calculate a Medicaid ineligibility period

You may have heard that a Medicaid applicant becomes ineligible for benefits as a result of giving away assets.

But what are the details?

First let me give you the rule, then we’ll examine the parts.

Rule:  A Medicaid applicant will be found ineligible for benefits as a result gifts made during the look-back period. Calculation of the length of the ineligibility period (also called “penalty period”) depends on the amount of total gifts. That period begins to run when the applicant is otherwise eligible for benefits.

Gifts. If you’re a Medicaid applicant, the rules allow you to spend your money as long as you can show you received goods or services at a fair value in return. What gets penalized is a gift – that is, a transfer of assets for less than fair market value. Pennsylvania regulations define fair market value as the “price which property can be expected to sell for on the open market or would have been expected to sell for on the open market in the geographic area in which the property is located.” 55 Pa. Code §178.2.

Some people deed a house to one of their children for $1. If the house could be sold for $100,000, then Medicaid rules would count that transfer as a gift of $99,999.

Currently in Pennsylvania, no penalty period applies if total gifts in a calendar month were $500 or less. 62 P.S. § 441.5(a).

Some transfers are exempt from penalty, and therefore do not result in any penalty.

Look-back period. The rule applies only to gifts made during the look-back period, which you can read about here. Gifts made before don’t count.

Calculation. To calculate the period of ineligibility in Pennsylvania, the Department of Public Welfare divides the fair market value of the transferred property by the state’s penalty divisor (currently $266.70 per day, or $8,112.13 per month), a figure based upon the average statewide cost of nursing home care. Partial months are counted, but partial days are not. 

For example, if an applicant gave his son $30,000 during the look-back period, then the penalty period will be calculated to be 112 days ($30,000 ÷ $266.70 = 112.49, rounded down to 112).

Other states similarly divide the gifted amount by a regional penalty divisor to calculate the days of ineligibility, but the amount of the penalty divisor varies.

When the penalty begins.  The penalty period begins running when the transfer is made, or the date when the applicant would otherwise be eligible for benefits, whichever is later. For example, if an applicant gives his grandson $30,000 for college today, then applies for benefits four years from now, after suffering a stroke and spending down his other resources, the 112-day period of ineligibility will begin at the time of application.

But if a currently eligible Medicaid recipient deeds away his house today, the period of ineligibility would begin running today.

The take-away. Knowing the details of the ineligibility rules helps potential applicants make better planning decisions and (hopefully) avoid future ineligibility problems.

What is the Medicaid look-back period?

An applicant for Medicaid must report transfers of assets made in the five years (60 months) prior to applying.

This period of time is called the “look-back” period. Here are the basics of how it works in Pennsylvania.

When is it? In most cases, it’s the 60 months prior to making a Medicaid application. In Pennsylvania, caseworkers go by the date when the applicant signed the application.

Was the look-back period always 5 years? No. The look-back period used to be only 36 months for transfers made to an individual. Under the federal Deficit Reduction Act, adopted in February of 2006, the look-back period for such transfers gradually increased to 60 months between February 2009 and February 2011. For transfers made to a trust, the look-back period has long been 60 months.

What has to be reported? Pennsylvania’s current Medicaid application for long term care contains the following questions:

Within the past 60 months, have you or your spouse closed, given away, sold or transferred any assets such as: a home, land, personal property, life insurance policies, annuities, bank accounts, certificates of deposit, stocks, IRA, bonds or a right to income?

Within the past 60 months, have you or your spouse transferred any assets into a trust?

If yes to either question, explain circumstances…

Note that the law requires disclosure of transfers made by the applicant or his or her spouse.

Does every transfer during the look-back period make me ineligible? No. Whether you will be ineligible for benefits depends on a number of things such as the amount of the transfer and to whom it was made. We will explore this issue in more detail in a future blog post.