How Medicaid Penalizes Gifts: The Rules

Prior gifts harm Medicaid applicants by delaying when Medicaid starts. The delay is directly linked to the total gift value over a five-year period. This delay significantly harms persons needing care now. We see this time and again. Below we explain the basic rules on how Medicaid penalizes gifts.

How Do Gifts Arise?

A parent gives money to her child. The gift might be large or small, one time or repeated. Medicaid counts even gifts of a few hundred dollars.

A parent might have thought Medicaid permitted a gift because the gift had tax benefits. Not so. Tax planning is different than Medicaid planning. A gift for less than the annual gift tax exclusion (in 2023, $17,000) does not require a gift tax return and does not count against a person’s lifetime gift and estate tax exemption (in 2023, $12.92 million). But this is still a gift for Medicaid purposes.

Gifting is The Foundation of the Medicaid Rules

Asset transfer rules are the foundation of the Medicaid rules.  The three key concepts are: gift/transfer, lookback period, penalty. Each is interrelated: a gift that occurs during the lookback period is penalized. When a client in need of long-term care Medicaid has transferred assets, our task is to analyze the transfer for these elements. If we can demonstrate to Medicaid that an asset transfer is not within these elements, penalty might be avoided. But the elements are unbending. Below are the main elements.

First, a gift, also called an uncompensated transfer. A gift is a transfer of assets for less than fair market value. It is the first line of attack to have a transfer not be considered a gift. Full fair market value must be given in exchange for the transfer.  

Second, a gift is penalizable if it occurs during the lookback period. The lookback period is the 60 months (5 years) before one applies for Medicaid.

Third, how is a gift during the lookback period bad? The penalty. The penalty is the number of months the Medicaid applicant is ineligible for Medicaid because of the total gifts made during the lookback period.

How does Medicaid calculate the penalty period? Medicaid takes the total of the gifts made during the lookback period and divides it by the penalty period divisor as determined annually by the State. In 2023 the penalty period divisor in the State of Delaware is $10,953.

Here is an example of how to calculate the penalty period using easy numbers: Father gifts $50,000 to his son. 2 years later the father enters a nursing home and applies for Medicaid. Medicaid looks back 5 years and sees the gift made 2 years prior. At the time of application the penalty period divisor is $10,000. $50,000 divided by $10,000 is 5 months.

When does the penalty period start? When the applicant is determined “otherwise eligible” for Medicaid but for the penalty period. This means:

Financially eligible: the applicant’s assets are below the permitted resource amount, as determined by Medicaid. In 2023, 1) the resource limit for a single individual is $2,000; 2) for a married couple, the maximum resource limit for the spouse residing in the community is $148,620 (called the Community Spouse Resource Allowance) and the institutionalized spouse’s resource limit is $2,000.

AND

Medically eligible: This means being determined to require an institutional level of care. The individual need not reside in a nursing home: it could mean nursing home services, services equivalent to nursing home but in another setting, or home and community based services under a waiver program. Nursing facility care, assisted living, and in-home care are covered.

If there is going to be a penalty, it is important to get the penalty period started as soon as possible. How? File the application once below the resource limits and get the penalty assessed. An applicant may have to file a second application once the penalty period has expired.

The Deficit Reduction Act of 2005

The Deficit Reduction Act of 2005 (the “DRA”) became effective February 8, 2006. It is still key legislation.

The DRA greatly changed Medicaid in at least two ways:

First, it changed the lookback period to 60 months (5 years). For gifts made prior to the effective date of the DRA, the lookback period was 36 months.

Second, under the DRA the penalty period starts NOT at the date of the transfer of the assets, but the date the Medicaid Applicant is otherwise eligible.

Are some transfers permitted?

By very narrow restriction Medicaid law exempts certain transfers of assets, to certain persons, on public policy grounds. These are defined by Medicaid law as “exempt transfers” and exceed the scope of this article. These exempt transfers typically are made proactively with elder law attorney advice in a Medicaid qualification plan, not by the layperson, or by the attorney not expert in Medicaid law. Do not make a transfer thinking it may be exempt. There are very strict requirements to quality for an exempt transfer.

Is it possible to cure a gift?

Delaware permits full or partial return to cure or partially cure a gift. The person returning the funds to the applicant need not be the person who first received the gift. Consult with a knowledgeable elder law attorney regarding the return or partial return of any gift as requirements must be satisfied.

Planning Strategies: The RULES and the TOOLS

Above are some of the key RULES that form the foundation of Medicaid law. But there are TOOLS that Federal and State law permit individuals to use to protect their assets and qualify to receive Medicaid. One of our roles as Certified Elder Law Attorneys is to know these RULES and apply the TOOLS to serve our clients in need. Once gifts are made, circumstances and law can make it impossible to fix them. Consult with an experienced elder law attorney about your options before taking action.