Families and individuals with low incomes can get health insurance through Medicaid. However, because of…
How to Avoid the Medicaid Penalty Period
In order to qualify for Medicaid assistance for nursing home care, assisted living, in-home care, or adult foster care, individuals must meet the qualifications of low income and assets. As a result of these rules, many candidates give away their money and resources to qualify. However, there is a “look-back period” before the individual’s application acceptance, during which time the Medicaid administering agency reviews all individual financial transactions. Transactions in violation of the look-back rules will garner a penalty in the form of time, where the applicant becomes ineligible for Medicaid. This time frame can be months and even years.
Forty-nine of the fifty states have a look-back period of five years (or sixty months). The exception is California, with a thirty-month look-back period. This period of Medicaid ineligibility is a penalty period with no maximum. To determine the penalty period, Medicaid takes the dollar amount of assets transferred and divides it by the daily private patient rate of nursing home care or the average monthly private patient rate.
There are certain look-back exceptions and exemptions, particularly for families in difficult situations. These are very often confusing options and often difficult to implement without the expertise of a Medicaid planning attorney. Certain common mistakes and violations can occur.
Gifts – The federal government’s annual gift tax exclusion amount per recipient is $16,000 in 2022 via the estate and gift tax exemption. However, Medicaid does not consider this transaction exempt from its look-back period. Even birthday gifts or other special occasions like holidays or weddings may result in a Medicaid penalty. Gifting rules change state by state, making things even more complex.
Lack of Documentation – If you transact an asset and receive a value equal to the fair market value without proper documentation, you may violate the rules of the look-back period. This situation is particularly relevant for assets with a government record like boats, motorcycles, or vehicles because of their registration requirements.
Irrevocable Trusts – Many individuals incorrectly assume that an irrevocable trust (sometimes inaccurately called a Medicaid Qualifying Trust) is automatically exempt from the look-back period. Creating an irrevocable trust during the look-back period is considered a gift and a countable asset. Irrevocable trusts created before the look-back period are not countable assets.
Because Medicaid is a federal and state program, look-back rules vary by state. Even the penalty divisor amount varies by state because the average cost of nursing home care varies. Some states calculate using a monthly average penalty divisor, while others use a daily average penalty divisor. In New York, the rules governing asset transfer under fair market value do not include home care, sometimes called community care. Instead, they only apply regarding nursing home care. Pennsylvania will permit an individual to gift $500 per month without violating the Medicaid look-back period. Understanding the nuances and differences between states and Medicaid rules is crucial to successful planning.
Strategies to avoid violating Medicaid look-back rules and avoiding penalties can help families keep some of their assets while still qualifying for Medicaid. A Medicaid planning attorney can help you identify which strategy is best to implement in your circumstance. These strategies can be extremely complex and require professional help. It is easy to have a loved one disqualified, but very difficult to rectify the problem.
Caregiver Agreements – Also referred to as Life Care Agreements, Elder Care Contracts, or Long-term Care Personal Support Services Agreements, the formal agreements permit compensation to the caregiver, spending down assets for services without violating the look-back period. These contracts between a caregiving relative, friend, or older adult permit a senior to receive necessary care that Medicaid does not cover while also providing the caregiver with needed compensation. This contract requires the services of an attorney to ensure its careful drafting.
Medicaid Exempt Annuities – This annuity type is common to avoid violating the Medicaid look-back period. An annuity is a lump sum payment in cash by an individual in return for a monthly payment for the duration of that person’s life or a set number of years. These annuities are Medicaid compliant because they turn assets into income, lowering the assets of the Medicaid candidate below the Medicaid eligibility limit. Some annuities qualify, while others do not, be certain to choose the right product if the goal is Medicaid qualification.
Irrevocable Funeral Trusts – This trust type sets aside a specific amount of money (within state limits) for the sole purpose of funerary and burial costs. This trust helps applicants spend down excess assets without violating the Medicaid look-back period.
Undue Hardship Waiver – Filing an undue hardship waiver request occurs when individuals violate the Medicaid look-back period, but it renders them without basic needs like shelter and food. It is difficult to receive this waiver as there must be an effort to exhaust all avenues of asset recovery, including legal options.
Recuperation of Assets – If previously transferred assets during the look-back period can be recovered, the previous penalty established can be reconsidered. Some states will review all assets transferred to all people. Partial recovery of said assets may shorten the penalty period in some states but not in others. Though the returned assets will put an applicant over the Medicaid asset limit, these assets can then pay for long-term care as the applicant reapplies.
The surest way to avoid violating a look-back period infraction and qualify for Medicaid is to consult a qualified Medicaid planning attorney before you gift or transfer any assets. If a violation has already occurred, a qualified attorney can also offer assistance to rectify what has gone wrong. The best option to avoid the Medicaid penalty period is to plan proactively.
We hope you found this article helpful. Contact our Auburn office at 260-925-3738 to create a plan that harmonizes its moving parts, so the gears will work together and you will leave the legacy you intended.