One of the most misunderstood aspects of Medicaid is the look back period for asset transfers and how that affects eligibility for elderly people in need of long-term healthcare.
Let’s start with a quick explanation. Medicaid is different from Medicare (although many people, by mistake, refer to the two programs interchangeably.) Medicare is an entitlement program paid for through payroll withholding. Medicaid is a form of social welfare designed to help people in need. Medicaid is administered by each state and sometimes by each county within a state – which means the rules and benefits can and do often vary.
Generally speaking , Medicaid is designed to pay for long-term care once the individual’s funds and assets are extinguished. In simple terms, if you have $200,000 in savings, you are expected to use those savings to pay for your care – once your savings are gone, then Medicaid will kick in.
That’s why many people engage in long-term planning to protect at least some portion of their savings and assets – so that those assets can be used to support a spouse or children – while still allowing them to qualify for Medicaid under program guidelines.
Say, for example, you wish to leave $10,000 to your daughter when you pass away. If you need to enter a nursing home, you may be required to use that $10,000 to pay for your care before Medicaid steps in. One way to protect those funds is to gift that money to your daughter now. (For 2014 you can give up to $14,000 to any individual without paying gift tax.)
That’s great – but beware the look back period.
When you apply for Medicaid, any gifts or transfers of assets made within five years (60 months) of the date of application are subject to penalties. Any gifts or transfers of assets made greater than 5 years of the date of application are not subject to penalties. Hence the five-year look back period.
For example, say you made gifts of $10,000 per year to your daughter in 2011, 2012, and 2013. All of those gifts are subject to the look back period and those gifts will result in a penalty where Medicaid is concerned. (You won’t be taxed on those gifts, because you met the gift tax guidelines… but barring relatively involved estate planning techniques, you will incur a Medicaid penalty.)
That’s why Medicaid planning strategies should be put in place long before a potential need arises. While you can’t plan for the unforeseen, as life expectancies continue to increase it is fairly safe to assume most people will eventually require some form of long-term healthcare.
But keep in mind Medicaid planning isn’t the only reason to start planning. Say, instead of $10,000, you have $100,000 you plan to someday leave to your daughter. That’s an admirable goal… but those funds may be even more useful to her now than they will a number of years from now. Making gifts of up to $14,000 a year (or whatever the gift tax limit is in any particular year in the future) avoids current taxes, avoids the potential of estate taxes, is a smart move where Medicaid planning is concerned… and provides funds your daughter can use to buy a home, pay for her education, save for retirement, etc.
So remember: the Medicaid look back period is five years from the date of application for Medicaid benefits, and any gifts or transfers made within that five year period are subject to penalty.