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In the words of Mark Twain, “[t]he mere knowledge of a fact is pale; but when you come to realize your fact it takes on color.” While you might know that Medicaid has a five-year lookback period, it might not be clear to you exactly what this means. Without knowing the specifics, you might assume that it is too late for you to do any long-term care planning, or you might rush into engaging in such planning before you should.
Essentially, the five-year lookback means that an individual applying for Medicaid must disclose any gifts/transfers made by the individual or the individual’s spouse within the five years leading up to the Medicaid application. Any such gifts result in a penalty period. The penalty period is the number of months for which the applicant will be ineligible for Medicaid benefits. In other words, the government will not cover the individual’s long-term care expenses until the penalty period has run.
It is a common misconception that if one does not have the ability to wait five years, there is nothing that can be done. However, this is not always the case. Crisis planning can be done in situations where there is a current need for long-term care. However, some long-term care plans will always take five years to work. This is true of situations where the assets are significant enough that a penalty period would be close to or more than 60 months.
There are certain transfers that one might not think of as gifts but that will count as improper transfers for Medicaid purposes. For example, if a house or a car is sold within the five years leading up to the filing of a Medicaid application, and it is sold for less than fair market value, this may result in a penalty for Medicaid purposes (the amount of the gift being the difference between the fair market value of the property sold and the actual sale price). On the other hand, there are transfers that are very clearly gifts but that Medicaid treats as exempt transfers. For instance, the house can be transferred to a “caretaker child” who lived in the home with the parent for at least two years and whose presence in the home kept the parent out of a long-term care facility. Assets can also be transferred to a child who is disabled, to a trust for the sole benefit of such child or to a trust for the sole benefit of an individual under the age of 65 who is disabled. Transfers can also be made to certain self-settled trusts (i.e., trusts funded with the Medicaid applicant’s own assets); however, such trusts must have a payback provision requiring reimbursement to the State of Ohio when the Medicaid applicant passes away (up to the total amount of Medicaid benefits paid during the individual’s lifetime).
The penalty period is calculated by taking the amount that was gifted and dividing it by a penalty divisor. The current penalty divisor is $7,453. In a case where an individual makes a gift of $74,530, the penalty will be ten months long. The penalty does not run until the Medicaid applicant has filed the application and is otherwise eligible, which has a different meaning depending on whether the applicant is single or married. (A discussion of the Medicaid eligibility requirements is beyond the scope of this article.) What this means is that the penalty does not start to run when the gift is made, and the only way to avoid the penalty is to wait five years (even if the penalty period would be less than five years). The length of the penalty period is the same in year one of the lookback period as it is in year four of the lookback period. Therefore, if the Medicaid applicant does not wait at least five years from the date of a gift, the entire penalty period for that gift (and any other gifts made within the prior five years) is imposed at a time when the Medicaid applicant is essentially out of funds with no ability to pay the nursing home bill. If the recipient of any gifted funds still has those funds, they can be used to pay during the penalty. However, once a gift has been made, the recipient of the gift has no legal obligation to use those funds for the donor’s benefit. A gifting plan should be carefully considered, and all risks weighed against the potential benefits of the planning before assets are transferred.
While it is never too early to have a conversation about whether such planning make sense, it can sometimes be too early to engage in the planning. For example, it may not be advisable for someone who only owns their home and has a limited amount of cash in the bank to engage in long-term care planning unless the individual has a current need for long-term care. In order to do this type of planning, which involves giving away assets, it is advisable for the individual to retain enough assets to cover the estimated cost of long-term care if it is needed during the lookback period. As described above, the penalty does not start to run when the gift is made. Therefore, when gifts are made before long-term care is necessary, the plan may not work if such care is needed before the end of the lookback period. If the recipient is willing to return the gift, the entire gift must be returned in order to properly “cure” the gift. Therefore, if gifted funds are invested and the value of the investments decreases below the value of the initial gift or any of the gifted funds have been used, there can be issues with curing the gift. Although waiting can seem counterintuitive, in certain situations, it is advisable. Keep in mind that planning can often be done at the time care is needed to preserve a portion of the individual’s assets.
Having only limited knowledge about Medicaid and how the five-year lookback period works can potentially scare individuals into thinking they need to do long-term care planning before they should. You should consult an elder law attorney if you have concerns about the cost of potential future long-term care or long-term care is currently needed. Even if it is premature to do a full Medicaid plan, a Medicaid preplan can be put in place. Most importantly, have an elder law attorney review your financial power of attorney to make sure that it is drafted properly to allow for planning in the future if you become unable to do this type of planning for yourself. A power of attorney that works for standard day-to-day matters may still lack the powers needed to do long-term care planning, which powers must be expressly granted in the power of attorney document. An elder law attorney can also tell you what types of life changes should trigger a call to the attorney to start planning. The more knowledge you have, the better prepared you will be to address long-term care considerations either now, if necessary, or in the future.
Note: This is a general summary of the law and should not be used to solve individual problems as slight changes in the fact situation may require a material variance in the applicable legal advice.
Stephanie A. Lehota, CELA
slehota@kwgd.com
330-497-0700
4775 Munson St. NW
Canton, OH 44718