Solutions to Deal with the 5 Year Transfer Rule in your Medicaid Planning
Bob Richards--Marketing and Financial Services
The term ‘Medicaid Planning’ often refers to transferring your assets to qualify for Medicaid coverage of your long term care (LTC) costs. Yearly nursing home costs – about $75,000 nationwide can quickly deplete your savings and just paying long term care insurance premiums can be costly too. Those with assets below $1 million often do Medicaid long term care planning.
Medicaid has become the major source of financing for long-term care paying nearly half of all nursing-home bills after residents run out of money. Most states require nursing-home residents to spend virtually all of their assets – down to as little as $2,000 – before they may qualify. Couples have a higher allowance if one spouse is healthy enough to remain at home.
But Medicaid was intended to provide health care for the poor. So, to frustrate Medicaid Planning, the government now requires that all asset transfers be completed 5 years (the ‘look-back’ period) before applying for Medicaid. Previously it was 3 years for transferring asset to others directly and is grandfathered for such transfers made before February 8, 2006.
Violating the 5 year look-back period will penalize you from immediately collecting Medicaid benefits. The penalty requires you to pay whatever Medicaid benefits you receive for a number of months equal to the value you transferred divided by the monthly Medicaid benefit in the state you receive them. So if you give $60,000 to family members in a state paying $6,000 monthly Medicaid benefits, you – or you family – will have to pay for the first 10 months.
You may consider setting up an irrevocable trust to remove assets from your estate but earmark trust income – but not principal – for living expenses to live at home. You can also leave some unprotected assets for your use and for initial long term care costs.
If you require long term care before the 5 year look-back period passes, then the beneficiaries can take an advance on their trust inheritance or sell the house to raise cash for care costs. If you make it beyond the 5 year look-back period, the trust principal is protected and you can receive Medicaid benefits as soon as any unprotected assets are spent down for Medicaid costs.
Even if you need help within the 5 year period, you can draw up a care-giver agreement to pay a relative for care-giving services – as driving to medical appointments, helping with household chores and coordinating or providing care. These ‘reasonable’ payments help draw down your assets closer to the point of Medicaid eligibility while passing cash on to a family member.