This blog post is the seventh chapter of a series entitled “How to Qualify for Medicaid in Pennsylvania” that focuses specifically on gifts and the look-back period. Qualifying for Medicaid can be confusing and complicated, but this guide explains it in plain English. If you would like to order a copy of the complete guide click here.
NOTE: The Medicaid numbers used in this post are those in effect in February of 2022.
Before learning how to spend down to qualify for Medicaid, you need to know the rules about how the state penalizes the gifting away of assets.
What is a gift?
In the Medicaid context, a gift is a transfer of assets for less than fair consideration. “Fair consideration” is generally the fair market value for goods and services.
A gift counts if it is made by either the applicant or the applicant’s spouse or dependent.
Example #1: Naomi deeds her home worth $200,000 to her son for one dollar. Naomi did not receive fair consideration. She made a gift in the amount of $199,999.
Example #2: Bill sells his car to his friend Sam for $18,792, the exact value of the car’s make and model according to the Kelley Blue Book (a recognized authority on used-car values). Bill has not made a gift because he received the fair market value in return for transferring title of the car to Sam.
Example #3: While Ned is in the hospital following a stroke, his wife Leona decides to spend $20,000 to go on a luxury cruise. Leona’s conduct may be callous and irresponsible, but she has not made a gift, as long as $20,000 is the price normally paid for her cruise. Leona received the fair market value of services for her expenditure of $20,000.
When someone files a Medicaid application, the state “looks back” five years from the application date to see if the applicant – or the applicant’s spouse – made any gifts during that time period. In Pennsylvania, the Medicaid application (Form PA 600L) 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? Yes / No Within the past 60 months, have you or your spouse transferred any assets into a trust? Yes / No If yes to either question, explain circumstances (attach extra paper if needed) …” The five-year (60-month) timeframe prior to the application date is called the “look-back period.” Gifts made during the look-back period are penalized with a period of Medicaid ineligibility.
Calculating the Penalty
Pennsylvania bases its gift penalty calculation on the average cost of nursing home care in the state. The Pennsylvania Department of Human Services publishes that average cost at the beginning of each year. For 2022, that cost is $482.50 per day, and $14,676.04 per month. The daily or monthly figure is referred to as the penalty divisor.
The caseworker reviewing a Medicaid application adds up all gifts made during the look-back period and divides the figure for total gifts by the current daily penalty divisor to determine the number of days the applicant is ineligible.
Gifts made during the look-back period are penalized with a period of Medicaid ineligibility.
While the Department of Human Services publishes the penalty divisor in terms of both days and months, the regulations state that the period of ineligibility is determined by dividing total gifts by the daily penalty divisor. Partial days of ineligibility are rounded down.
For example, the penalty in 2022 for a $20,000 gift would be calculated as follows: $20,000 ÷ $482.50 = 41.45, rounded down to 41. The period of ineligibility is therefore 41 days.
The rationale for this rule is that if the applicant hadn’t given away, say, $44,000 of her assets, then she would have been able to pay for approximately three months of care at a rate of $14,676.04 per month. So the penalty will be the three months she could have paid for herself, if not for the gift.
When the Penalty Starts
Any penalty arising from gifts during the look-back period begins to run when the applicant would otherwise be eligible for benefits if not for the gifts.
Example: Harry signed over a vacation cabin worth $40,000 to his daughter four years before applying for Medicaid. On January 31, 2022, he made a payment of $11,000 to the nursing home and was left with $1,000 in his checking account (his only remaining asset).
Harry will be ineligible for Medicaid benefits for a period of almost three months ($40,000 ÷ $482.50 = 82 days of ineligibility). His ineligibility period starts to run February 1, the date he would have been eligible for benefits, if not for having made a gift.
Special Rules for Annuities and Loans
Medicaid law contains special rules applying to annuities, promissory notes, loans, and mortgages.
If an applicant (or spouse) buys an annuity (or makes certain changes to an existing annuity) during the look-back period, the annuity must comply with the requirements of the Deficit Reduction Act (DRA), a federal law that took effect in Pennsylvania in 2007. Among other requirements, the annuity must name the Pennsylvania Department of Human Services as the primary beneficiary to the extent of its applicable Medicaid costs.
The DRA contains other rules relating to promissory notes, loans, and mortgages made during the look-back period.
If the applicant or spouse transferred funds in connection with one of these financial instruments, that transfer may trigger a penalty period if the instrument fails to comply with the requirements of the DRA.
For that reason, it is best to avoid entering into one of these instruments if there is a reasonable chance you may apply for Medicaid within the next five years, unless you do so under the guidance of a lawyer well versed in the terms of the DRA. Annuities offer significant opportunities for asset protection, but also pose significant risks if not done correctly. So again, they should only be purchased with the assistance of an experienced elder law attorney.
A period of ineligibility can have serious negative consequences.
The nursing home may seek to discharge the applicant for non-payment because there is no Medicaid coverage, and the applicant has exhausted his or her assets. Family members may suffer financial hardship to pay for care during the ineligibility period. A community spouse may deplete assets he or she hoped to live on in the coming years.
The point of the ineligibility period, of course, is to deter potential Medicaid applicants from trying to become eligible for benefits by simply giving away their assets.
Pennsylvania allows an exception to the penalization of gifts during the look-back period. Gifts by the applicant, recipient, or spouse that total no more than $500 in any calendar month will not be penalized. Keep in mind several important points. First, that rule applies to total gifts in that month, not gifts per person. Second, if total gifts exceed $500, the entire amount is subject to penalty. Third, the rule does not apply to average gifts per month, but on actual gifts made during that calendar month. The examples below illustrate these points. Example #1: Joe has three children. He makes a $500 gift to one child in January, a $500 gift to a second child in February, and a $500 gift to a third child in March. He repeats that pattern of gifting for the rest of the year, and never exceeds $500 in gifts to anyone in any given month. By December, Joe has gifted away $6,000. None of Joe’s gifts can be penalized because he never exceeded the $500 limit in any month. Example #2: Frank has three children. He makes a $1,000 gift to one child in January, a $1,000 gift to a second child in February, and a $1,000 gift to a third child in March. He makes no more gifts for the rest of the year. By December, Frank has gifted away $3,000. All of Frank’s gifts can be penalized because they all exceeded $500 in the months they were made.
Q: Doesn’t the government allow me to make gifts of $16,000 per person per year?
A: Don’t confuse (1) the federal government’s rule relating to gift tax, with (2) the rule penalizing gifts made during the look-back period for Medicaid purposes. They are two entirely distinct rules.
Under the first rule, the IRS allows citizens to make gifts of up to $16,000 (2022 figure) per person, per year without having to file a gift tax return reporting those gifts. In addition, such gifts will not be included in a person’s lifetime gift total for purposes of determining gift tax.
However, that rule in no way limits the gifting penalty you may incur if you apply for Medicaid.
This post is part of a series about “How to Qualify for Medicaid in Pennsylvania”
- Medicaid for Long Term Care
- Countable Assets
- Exempt (Non-Countable) Assets
- Asset Limit: Applicant & Spouse
- Spouse's Income
- When No Spend Down Is Necessary
- Gifting & the Medicaid Look Back Period
- How to "Spend Down" to Qualify
- Liability for Care Costs and Applicants' Children
- Medicaid Application Process
- What Happens After Medicaid/ Approval
- Medicaid Waiver Program
- Estate Recovery – What Happens After Death?
14. What is Medicaid Planning?