This is one of the most common questions I hear as an elder law attorney. Its also an area that gets medicaid applicants in to a lot of trouble – especially when they think they understand the 5-year look back and try to play amateur medicaid planner.
What is the Medicaid Five Year Look Back Period?
When one applies to Medicaid’s institutional care program, the file will be assigned to a Medicaid case worker. The Medicaid case worker will review all transactions for the prior five years to determine whether any assets (money, stocks, property, etc…) were given to any individual or entity for less than fair-market value (also called a “gift”). This review by the Medicaid case worker is referred to as the "look back period."
If the caseworker finds transfers without value/gifts within that five-year period, a penalty period is assessed. The purpose of the Medicaid penalty period is to dissuade Medicaid applicants from giving away their assets for the sole purpose of qualifying for Medicaid. During the penalty period, Medicaid will not pay for the long-term care.
The DRA also amended the date when the Medicaid penalty period starts. Prior to the DRA, the penalty period began with the month in which the gifted asset was transferred. Now, the penalty period begins with the date of the asset transfer or the date the medicaid applicant enters the nursing home and otherwise qualifies for Medicaid, whichever is later!
How is the Medicaid Penalty Period Calculated?
The Medicaid penalty period is calculated per a state formula. Add up all the gifts and divide by the Florida Medicaid Penalty Divisor (which is the average monthly cost of a nursing home in Florida). The result is the number of months that Medicaid will not pay. The penalty period divisor as of July 2018 is: $9,171.00 (NOTE: this divisor changes periodically).
Example of How the Medicaid Penalty Period is Calculated and Works:
John wants to apply for Medicaid in September of 2016. John has a son and a daughter. After reviewing his financial records, the Medicaid case worker notes that:
1. In July 2011, John transferred $70,000 to his brother;
2. In January 2014, John transferred his stock portfolio to his son (worth $73,627); and
3. In December 2015, because John loves his children equally, John also wrote his daughter a check for $73,627.
Besides these gifts, John is otherwise eligible for Medicaid. At the time of application the Medicaid-transfer-penalty divisor was: $8,662.00
The gift to his brother is beyond the 5-year medicaid lookback period and so does not figure into the penalty period. However, the uncompensated transfers of funds to both of John’s children are each within the five-year look back and the Medicaid case worker would add them up (together $147,254) and divide by the Medicaid penalty divisor: $147,254 / $8,662 = 17. 17 is the number of months Medicaid will refuse to pay for John’s long term care. John will be eligible for Medicaid benefits in February, 2018.
The Medicaid penalty period has no cap and so it is possible for the Medicaid penalty period to exceed five years.
Medicaid Penalty Hardship Waiver
Under the DRA, a Medicaid applicant can apply for a hardship waiver where it can be proven that the medicaid applicant cannot get their assets returned to them and the imposition of the penalty will cause substantial hardship that will prevent them from being able to cloth, feed or shelter themselves. This is a very high burden and likely to be rejected by Medicaid except under clear hardship circumstances.
Irrevocable Five Year Trust Strategy
When someone comes to me healthy but understanding that, statistically, most older adults will eventually need long-term care, we can engage in medicaid preplanning. As your elder law attorney, we have significantly more options to work with. One of which is the 5-year trust Medicaid planning strategy.
Generally, this is a strategy worth considering if my client is healthy, and/or has long-term care insurance, and has beneficiaries he or she truly trusts. As mentioned, the Medicaid look back period is 5 years. So, any gifts or transfers without value (or less than fair market value) made 5 years and 1 day prior to date of application are not subject to review.
The Medicaid Five Year Trust Strategy involves created an irrevocable trust where the eventual Medicaid applicant is the grantor but not a beneficiary (read more about Estate Planning Basics). The eventual Medicaid applicant transfers most of their assets into this irrevocable trust. The terms of the irrevocable trust state that the grantor cannot touch these assets, the grantor cannot amend the irrevocable trust, and the trustee of the trust is forbidden from distributing any of these assets to the eventual medicaid applicant under any circumstances. The very day these assets are transferred into the trust, they are deemed a non-countable asset by Medicaid (because the eventual Medicaid applicant has no access to the trust assets). But those assets are deemed a gift and subject to the five year look-back period.
The trustee, however, may be able to distribute income and assets to the Medicaid applicant’s children as beneficiaries of the irrevocable trust. The children can use the distributed proceeds for any purpose they wish, including caring for their parent.
Risks of 5-Year Irrevocable Trust Strategy
Almost all medicaid planning strategies have pros and cons. Purposefully subjecting oneself to the five-year look back period certainly has its own set of risks. As an elder-law attorney, it is my job to explain the pro and cons of multiple strategies and ultimately decide, together, what is best. In this case, the five year irrevocable trust has the following risks:
1. While the beneficiaries under the irrevocable trust can use the proceeds to care for the Medicaid recipient, they can also take the money to Las Vegas and put it all on red. The trust cannot instruct the beneficiary to use the money for the benefit of the parent – in fact, doing so would be Medicaid fraud.
2. The eventual Medicaid applicant loses control over the assets placed in the irrevocable trust. Losing control is never ideal.
3. What if the eventual Medicaid applicant needs Medicaid before the five year look-back period has elapsed? We cannot predict when someone will get into a bad car accident, have a stroke, or suffer some other incapacitating malady.
As an elder law attorney, I would never suggest the five-year trust medicaid planning strategy alone. We would discuss putting back up strategies in place should something happen within five years.
As they say – hope for the best, but plan for the worst.
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