Fong Law Group

Transferring Assets to Qualify for Medicaid

Transferring assets to qualify for Medicaid can make you ineligible for benefits for a period of time. Before making any transfers, you need to be aware of the consequences. 

Congress has established a period of ineligibility for Medicaid for those who transfer assets. The so-called "look-back" period for all transfers is 60 months, which means state Medicaid officials look at transfers made within the 60 months prior to the Medicaid application. 

While the look-back period determines what transfers will be penalized, the length of the penalty depends on the amount transferred. The penalty period is determined by dividing the amount transferred by the average monthly cost of nursing home care in the state. For instance, if the nursing home resident transferred $100,000 in a state where the average monthly cost of care was $5,000, the penalty period would be 20 months ($100,000/$5,000 = 20). The 20-month period will not begin until (1) the transferor has moved to a nursing home, (2) he 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. Therefore, if an individual transfers $100,000 on April 1, 2017, moves to a nursing home on April 1, 2018 and spends down to Medicaid eligibility on April 1, 2019, that is when the 20-month penalty period will begin, and it will not end until December 1, 2020.

Transfers should be made carefully, with an understanding of all the consequences. People who make transfers must be careful not to apply for Medicaid before the five-year look-back 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 size of the transfer.

Be very, very careful before making transfers. Any transfer strategy must take into account the nursing home resident's income and all of his or her expenses, including the cost of the nursing home. 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. Do not give away your savings unless you are ready for these risks.

In addition, be aware that the fact that your children are holding your funds in their names could jeopardize your grandchildren's eligibility for financial aid in college. Transfers can also have bad tax consequences for your children. This is especially true of assets that have appreciated in value, such as real estate and stocks. If you give these to your children, they will not get the tax advantages they would get if they were to receive them through your estate. The result is that when they sell the property they will have to pay a much higher tax on capital gains than they would have if they had inherited it.

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 and have sufficient resources to maintain your present lifestyle.

Remember: You do not 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.

Even though a nursing home resident may receive Medicaid while owning a home, if the resident is married he or she should transfer the home to the community spouse (assuming the nursing home resident is both willing and competent). This gives the community spouse control over the asset and allows the spouse to sell it after the nursing home spouse becomes eligible for Medicaid. In addition, the community spouse should change his or her will to bypass the nursing home spouse. Otherwise, at the community spouse's death, the home and other assets of the community spouse will go to the nursing home spouse and have to be spent down.

Permitted transfers

While most transfers are penalized with a period of Medicaid ineligibility of up to five years, certain transfers are exempt from this penalty. Even after entering a nursing home, you may transfer any asset to the following individuals without having to wait out a period of Medicaid ineligibility:

• Your spouse (but this may not help you become eligible since the same limit on both spouse's assets will apply)
• A trust for the sole benefit of your child who is blind or permanently disabled.
• Into trust for the sole benefit of anyone under age 65 and permanently disabled.

In addition, you may transfer your home to the following individuals (as well as to those listed above):

• A child who is under age 21
• A child who is blind or disabled (the house does not have to be in a trust)
• A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home

A "caretaker child," who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant's institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay.

Medicaid's Asset Transfer Rules

In order to be eligible for Medicaid, you cannot have recently transferred assets. 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 a penalty on people who transfer assets without receiving fair value in return.

This penalty is a period of time during which the person transferring the assets will be ineligible for Medicaid. The penalty period is determined by dividing the amount transferred by what Medicaid determines to be the average private pay cost of a nursing home in your state.

Example: If you live in a state where the average monthly cost of care has been determined to be $5,000, and you give away property worth $100,000, you will be ineligible for benefits for 20 months ($100,000 / $5,000 = 20).

Another way to look at the above example is that for every $5,000 transferred, an applicant would be ineligible for Medicaid nursing home benefits for one month. In theory, there is no limit on the number of months a person can be ineligible.

Example: The period of ineligibility for the transfer of property worth $400,000 would be 80 months ($400,000 / $5,000 = 80).

A person applying for Medicaid must disclose all financial transactions he or she was involved in during a set period of time -- frequently called the "look-back period." The state Medicaid agency then determines whether the Medicaid applicant transferred any assets for less than fair market value during this period.  The look-back period for all transfers is 60 months (except in California, where it is 30 months).  Also, keep in mind that because the Medicaid program is administered by the states, your state's transfer rules may diverge from the national norm.  To take just one important example, New York State does not apply the transfer rules to recipients of home care(also called community care).

The penalty period created by a transfer within the look-back period does not begin until (1) the person making the transfer has moved to a nursing home, (2) he 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 transfers $100,000 on April 1, 2017, moves to a nursing home on April 1, 2018, and spends down to Medicaid eligibility on April 1, 2019, that is when the 20-month penalty period will begin, and it will not end until December 1, 2020.

In other words, the penalty period would not begin until the nursing home resident was out of funds, meaning there would be no money to pay the nursing home for however long the penalty period lasts.  In states that have so-called "filial responsibility laws," nursing homes may seek reimbursement from the residents' children. These rarely-enforced laws, which are on the books in 29 states, hold adult children responsible for financial support of indigent parents and, in some cases, medical and nursing home costs.  In 2012, a Pennsylvania appeals court found a son liable for his mother's $93,000 nursing home bill under the state's filial responsibility law.

Exceptions

Transferring assets to certain recipients will not trigger a period of Medicaid ineligibility. These exempt recipients include the following:

• A spouse (or a transfer to anyone else as long as it is for the spouse's benefit)
• A blind or disabled child
• A trust for the benefit of a blind or disabled child
• A trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances).

In addition, special exceptions apply to the transfer of a home. The Medicaid applicant may freely transfer his or her home to the following individuals without incurring a transfer penalty:

• The applicant's spouse
• A child who is under age 21 or who is blind or disabled
• Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances)
• A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home
• A "caretaker child," who is defined as a child of the applicant who lived in the house for at least two years prior to the applicant's institutionalization and who during that period provided care that allowed the applicant to avoid a nursing home stay.

Congress has created a very important escape hatch from the transfer penalty: the penalty will be "cured" if the transferred asset is returned in its entirety, or it will be reduced if the transferred asset is partially returned. However, some states are not permitting partial returns. Check with your elder law attorney.

Medicaid's Gift to Children Who Help Parents Postpone Nursing Home Care

In most states, transferring your house to your children (or someone else) may lead to a Medicaid penalty period, which would make you ineligible for Medicaid for a period of time. However, there are circumstances in which transferring a house will not result in a penalty period.  

One of those circumstances is if the Medicaid applicant transfers the house to a "caretaker child."  This is defined as a child of the applicant who lived in the house for at least two years prior to the applicant's entering a nursing home and who during that period provided care that allowed the applicant to avoid a nursing home stay.  In such cases, the Medicaid applicant may freely transfer a home to the child without triggering a transfer penalty.  Note that the exception applies only to a child, not a grandchild or other relative.

Each state Medicaid agency has its own rules for proof that the child has lived with the parent and provided the necessary level of care, making it doubly important to consult with your attorney before making this (or any other) kind of transfer.

Others to whom a home may be transferred without Medicaid's usual penalty are:

• Your spouse
• A child who is under age 21 or who is blind or disabled
• Into a trust for the sole benefit of a disabled individual under age 65 (even if the trust is for the benefit of the Medicaid applicant, under certain circumstances)
• A sibling who has lived in the home during the year preceding the applicant's institutionalization and who already holds an equity interest in the home

How Much Will It Hurt to Tap Retirement Savings?

“If you are looking to pull cash from your 401(k) plan or traditional IRA without getting hit with a penalty, the IRS will allow you to do it.”

This is a move of last resort. You’ll need to do all the research to be sure this will not do more damage to your retirement savings than absolutely necessary. You are allowed to take a series of equal payments from your IRA or a 401(k) account, without being subject to a 10% penalty—but only under certain circumstances, advises CNBC in the article “How to tap your retirement savings without getting hit with a stiff penalty—but only if you absolutely have to.”

Taking an early withdrawal from a qualified retirement account before age 59½, results in a hefty 10% penalty in most situations. You must also add the taxes that you have to pay on the distribution itself. Yes, it’s your money but you agreed to keep it in the account under certain distribution limitations and the rules are not very flexible.

Except, when they are.

There are very specific sets of circumstances, when the IRS will let you take the early withdrawal and not have to pay a 10% penalty. One of these is receiving a series of equal payments from your IRA or 401(k), known among tax advisors as a “72(t) distribution.”

However, be careful: just because you can do this, doesn’t mean you should do it.

There are rules (of course!). You have to commit to take at least one payment a year for five years or until you reach 59½, whichever is the longer period of time. After that period is over, you can change your payment amount or stop the withdrawals.

If your money is in a 401(k), the rules are a little different: you must separate from service during or after the year you turn 55, in order to start taking payments.

However, if you make changes to your payments or if you go into the account for an additional withdrawal, you’ll get slammed with that 10% penalty retroactively for payments received plus interest.

What if you roll a 401(k) into the IRA after these series of payments? Don’t do it. That is a big mistake that could cost you plenty.

The numerous ways you can make a mistake and end up with a costly bill in penalties and taxes, makes this a no-no for practically every CPA.

Your alternatives: have an emergency fund or even take out a home equity line of credit. A 401(k) loan would be even better, as long as you know that you can pay it back.

Depending on the circumstances of your emergency, there may be some instances, where the IRS may waive your 10% penalty. But look, this is not a do-it-yourself project. Make sure you have excellent advisors on your team, if you need to take this step.

Reference: Financial Planning (Sep. 10, 2018) “How to tap your retirement savings without getting hit with a stiff penalty—but only if you absolutely have to”