Medicaid’s Asset Transfer Rules

Why not qualify for Medicaid coverage of nursing home care by simply transferring assets out of your name?

Congress does not want you to move into a nursing home on Monday, give all your money to your children (or whomever) on Tuesday, and qualify for Medicaid on Wednesday. So it has imposed restrictions on the ability of people to transfer assets before applying for Medicaid coverage without receiving fair value in return. These restrictions, already severe, were made even harsher by enactment of the DRA.

The restrictions impose a penalty for asset transfers –– a period of time during which the person transferring the assets (and his or her spouse) will be ineligible for Medicaid. The period of ineligibility is determined by dividing the amount transferred by what the state Medicaid agency determines to be the average private pay cost of a nursing home in your state.

For example: If you live in a state where the average monthly cost of care has been determined to be $7,000, and you give away property worth $140,000, you will be ineligible for benefits for 20 months ($140,000 ÷ $7,000 = 20 months).

However, for transfers made prior to enactment of the DRA on February 8, 2006, states Medicaid officials would look only at transfers made within the 36 months prior to the Medicaid application (or 60 months if the transfer was made to or from certain kinds of trusts). For transfers made after passage of the DRA, the so-called ‘lookback’ period for all transfers is 60 months.
The second and more significant major change in the treatment of transfers made by the DRA has to do with when the penalty period created by the transfer begins.

Under the prior law, the 20-month penalty period created by a transfer of $140,000 in the example above would begin either on the first day of the month during which the transfer occurred, or on the first day of the following month, depending on the state. Under the DRA, the 20-month period will not begin until (1) the transferor has moved to a nursing home, (2) has spent down to the asset limit for Medicaid eligibility, (3) has applied for Medicaid coverage, and (4) has been approved for coverage but for the transfer.

For instance, if an individual in our example transfers $140,000 on April 1, 2019, moves to a nursing home on April 1, 2020, and spends down to Medicaid eligibility on April 1, 2021, that is when the 20-month penalty period will begin, and it will not end until December 1, 2022. In other words, the penalty period does not begin until the nursing home resident is out of funds, meaning she cannot afford to pay the nursing home. If the applicant is already in a nursing home, the facility itself would likely have to foot the bill for the resident’s care. The implementation of this change has differed from state to state.

Transfers should be made carefully, with an understanding of all the consequences. Innocent gifts to grandchildren could, years later, result in extended periods without any long-term care coverage of any kind. People who make transfers must be careful not to apply for Medicaid before the five-year lookback period elapses without first consulting with an elder law attorney. This is because the penalty could ultimately extend even longer than five years, depending on the amount transferred. Also, bear in mind that if you give money to your children, it belongs to them and you should not rely on them to hold the money for your benefit. However well-intentioned they may be, your children could lose the funds due to bankruptcy, divorce or lawsuit. Any of these occurrences would jeopardize the savings you spent a lifetime accumulating.

Don’t give away your savings unless you are ready for these risks. In addition, transfers can affect grandchildren’s eligibility for financial aid and have bad tax consequences for children receiving the funds.

Moreover, the transfer of appreciated property to your children during your life can mean that your children will not get a step-up in basis in the property by inheriting it from you at your death.

Here’s how that works: Say you purchased stock for $10 a share 30 years ago and today it’s worth $100 a share. The $10 purchase price is your basis. If you sell the stock today, you will have a capital gain of $90 a share, the difference between the basis and the selling price, on which you will have to pay taxes. If you give the stock to your children, they will have the same basis as you and have to pay the same taxes if they sell it.

On the other hand, if they inherit the stock at your death, under current tax law the stock’s basis gets ‘stepped up’ to the value on your date of death. If that is $100 and your children sell the stock for $100, then there’s no gain and no tax.
In any case, as a rule, never transfer assets for Medicaid planning unless you keep enough funds in your name to (1) pay for any care needs you may have during the resulting period of ineligibility for Medicaid; and (2) feel comfortable in doing it and have sufficient resources to maintain your present lifestyle.

Remember: You don’t have to save your estate for your children. The bumper sticker that reads ‘I’m spending my children’s inheritance’ is a perfectly appropriate approach to estate and Medicaid planning. RLF

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