Understanding the Medicaid “Look- Back” and “Transfer Penalty” Rules

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In order to understand how and why gifts and other transfers of property can impact a person’s perspective eligibility for Medicaid long-term care benefits, you need to know what the “look-back” rule is and how it operates as to various gifts and other transfers of property.
Let’s start by noting the reason for the rule. Medicaid is a means-based medical assistance program. In other words, a person must have only a very small amount of assets to be eligible. Because someone who enters a nursing home generally has a limited life expectancy, and the circumstances won’t permit that person much of an opportunity to spend money on anything other than nursing home care, the incentive to hold onto assets for future personal use is very limited. By contrast, since paying out of pocket for nursing home care is very expensive and the threat that nothing will be left to pass on to loved ones can loom large, the incentive to transfer assets to loved ones to keep that from happening is, for most people, very substantial.
Without a rule that limited people’s ability to give away their assets when it became evident that they need nursing home care, even a millionaire could give everything away and be immediately eligible for
Medicaid. The “look-back” rule, which establishes penalties for gifts and other transfers of property made for the purpose of qualifying for Medicaid, prevents that from happening.
Traditionally, the look-back period was three years. In other words, gifts and other transfers made more than three years before someone applied for Medicaid long-term care benefits would not affect eligibility, but transfers made less than three years before applying might. In early 2006, Congress decided, as part of the Deficit Reduction Act (“DRA”), that three years wasn’t long enough, and increased that to five years. It was then up to the states to implement that change in the law.
Missouri, like most other states, did so fairly promptly. Illinois was one of the last two states to change its Medicaid rules to be consistent with DRA. Its new rules went into effect on January 1, 2012. However, the new rules apply retroactively in the case of someone who has made any gifts or other transfers of property on or after January 1, 2007, which are within five years of their date of application. There are some “hardship exemptions” that will be available to reduce the harsh impact of the penalties on people who made transfers before the effective date of the new rules. Just how those “hardship exemptions” will be applied is something that remains to be seen, as a body of experience in applying the new rules develops over time.
A comparison of the “old rules” and the “new rules” offers a useful framework in examining how the “look-back” rule operates.
The first thing to note is something both sets of rules have in
common. The “look-back” rule looks back from the month of application, not the time of admission to a nursing home or placement in a “Medicaid bed.” Let’s say that in June 2007, a very nice grandmother won a million dollars in the lottery, and rather than keeping it all, she divided it into ten shares, kept one, and gave $100,000 to each of her nine grandchildren. In 2010, she entered a nursing home, and now she is about to run out of money. As long as she waits until at least July 2012 to apply (more than five years after she made the gifts), even those very large transfers would not be a problem.
That fact is a very important consideration in advance planning for Medicaid eligibility. In many cases, the planning is done with the intention to “wait out” the look-back period, with the plan incorporating a means of assuring that, if the person doing the planning enters a nursing actual value and the sales price), placing assets into a trust over which one does not have access and control, or forgiving a debt.
People who think they can successfully evade the rules by making gifts in cash are usually in for a rude awakening when they later apply for Medicaid. The caseworker will ask for, and then carefully review, bank account records. If she sees that someone who has customarily withdrawn about $200 per month from the bank starts taking out $1,000 per month, or happens to withdraw $5,000 in December, that will raise a presumption of gifts subject to penalty, and penalties will be assessed unless the person who applies can come up with proof that the cash was applied to something other than gifts.
People are often confused as to what constitutes a “transfer,” and when it occurs, relative to adding someone’s name to a bank account or a deed. Oddly enough, the rules are different for those two situations.
When one person adds another’s name to a bank account, Medicaid considers that no transfer has occurred yet. The money is still treated as being owned 100% by the person who put the money into the
account. The transfer doesn’t occur until the money is taken out, and at that point, it doesn’t matter if the person who put the money in participated in, or even knew about, it being taken out.
For example, let’s say that when Dad died 10 years ago, Mom put
$60,000 into a savings account, and added her two children’s names to the account. Now Mom is in a nursing home, and her children each withdraw “their thirds” ($20,000 each) from the account. That will be treated as Mom making $40,000 in transfers, and transfer penalties will be assessed accordingly.
But let’s say that, on that same day 10 years ago, Mom added her two children’s names to the title to her home. As to real estate, that completed the transfer. The children can now each claim their separate interests, and Mom will be treated as owning only a one-third interest in the property.

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October 30, 2021