Medicaid's Five Year Look Back Period - What You Need to Know
by Don Drake, Connelly Law Offices, Ltd. 6.24.24
"Let's start today's blog by discussing the differences between Medicaid and Medicare, as these terms are often mistakenly used interchangeably. They refer to two distinct programs," said professional fiduciary and certified elder law Attorney RJ Connelly III. "Medicare is funded through payroll contributions and provides health coverage for individuals aged 65 and older and certain younger individuals with disabilities. Medicaid is a social welfare program for individuals with limited income and resources. Unlike Medicare, which is operated at the federal level, Medicaid is administered by each state and, in some cases, by each county within a state. This decentralized administration can lead to variations in regulations and benefits from one area to another."
Medicaid covers long-term care expenses once an individual's finances and assets have been depleted. If someone has $400,000 in savings, they are expected to use that money to pay for their care. Once their savings have been exhausted, Medicaid will offer coverage. And with the costs associated with long-term care, this money could be gone in less than three years. Because of this, many individuals engage in long-term Medicaid planning to safeguard a portion of their savings and assets, ensuring they can provide support for a spouse or children while still meeting the eligibility criteria for Medicaid.
"Most people do not realize how complicated the Medicaid application is," said Attorney Connelly. "As mentioned earlier, each state administers the Federal Medicaid program and constantly looks for ways to deny applicants. The unfair part of this is that after working their whole lives to build up assets and a legacy for their loved ones, pay taxes, and contribute to social welfare programs, individuals may find it nearly impossible to access the benefits they deserve when it comes time for the government to help with long-term care. One of the biggest challenges with Medicaid applications is the "look-back period."
The Look Back Period
When a senior applies for long-term care Medicaid, there are specific rules regarding the applicant's assets and any asset transfers within a specified period before applying for Medicaid. This period is known as the Look-Back Period, typically spanning the last five years (except in California, where it is 30 months, but that is in the process of being phased out). During this time, the state agency conducts a thorough financial review, examining bank statements, transactions, real estate sales, and income taxes to ensure compliance with Medicaid eligibility's asset and income requirements.
"If the state finds evidence of gifts or below-market-value transfers during the Look-Back Period, the total value of those assets is calculated and divided by the daily long-term care payment rate to determine the period of ineligibility," said Attorney Connelly. "As a result, the applicant may face a penalty period during which they will not receive Medicaid benefits. It's important to note that this review encompasses all financial accounts in the applicant's name, including checking, savings, and investments."
The purpose of the Look-Back Period and the associated penalties is to prevent individuals from gifting or selling assets below their value to qualify for Medicaid. By imposing a penalty period for non-compliant asset transfers, the state wants to ensure that assets that could have been used to cover long-term care costs are not removed through gifts or sales below their value. Any transfers made before the Look-Back Period are not subject to penalties. State Medicaid agencies carefully scrutinize all transfers, regardless of their size, and impose a penalty period for any non-compliant transfers, no matter how small.
The Look Back Penalty
"If non-allowable transfers are identified, the individual may face a lookback penalty, rendering them ineligible for Medicaid payments for a specific period," said Attorney Connelly. "This penalty is calculated by dividing the total ineligible transfers by the state's average private patient rate for nursing home care. Essentially, this penalty is designed to hold individuals accountable for assets that could have been used to fund their nursing home care."
For example, if the monthly nursing home costs amount to $10,000 and the individual transferred $50,000 to a family member, they may face an eligibility penalty of five months. This penalty commences from the month of the Medicaid application, not the month of the asset transfer.
Once the Medicaid lookback penalty period concludes, the individual may become eligible for Medicaid benefits if they refrain from transferring additional assets throughout the initial lookback penalty period.
Some Allowances
Understanding the Medicaid five-year lookback period is important to avoid penalties for ineligible transfers. By ensuring that asset transfers comply with the rules, you can prevent penalties from being imposed. Let's look at some of the allowances.
Community Spouse Resource Allowance (CSRA). The Community Spouse Resource Allowance (CSRA) limits are not the same in all states. However, this rule permits transferring a specific amount of money to your spouse while ensuring they can still live independently.
Disabled children. When considering financial assistance for a disabled child under twenty-one, transferring assets to support the child's care is possible. Another option is establishing a trust specifically for the child, which is generally more advisable.
Siblings. If you have a sibling who owns a portion of your home and has been living there for at least a year, they may be able to receive your interest in the home without incurring any penalties.
Adult Child Caregivers. Suppose your adult child lives with you and serves as your primary caregiver for at least two years before you apply for Medicaid. In that case, they may be eligible to receive your home without incurring any penalties.
Paying Off Certain Debt. You can pay off unlimited personal or joint debt without violating the Medicaid lookback rules. This applies to paying off your mortgage or Home Equity Line of Credit on a residence you may be eligible to transfer to another person.
"It is important to note that although these strategies are allowed under Medicaid regulations, consulting with a Medicaid attorney is advisable before making any transfers," said Attorney Connelly. "The rules are always subject to change, and the exemptions can be complex. It's crucial to avoid penalties resulting from misunderstanding a rule or skipping a seemingly minor step."
A Final Thought
"Medicaid reviews financial transactions from the past five years to prevent improper asset transfers, and if any assets are found to have been transferred improperly, the applicant may face penalties and be ineligible for Medicaid benefits for a specified period of time," stated Attorney Connelly. "There are legal ways to transfer assets, but following specific rules is essential. Before making asset transfers, seeking guidance from a qualified elder law attorney with experience in Medicaid planning or crisis planning is highly recommended to avoid penalties. Since the rules for Medicaid eligibility vary by state, seeking help is critical if you believe you may have violated Medicaid guidelines to ensure the situation is handled properly and professionally."
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