The Medicaid look-back period was created to prevent applicants from giving away assets, or selling them for less than fair market value, in an attempt to meet the asset limit and become eligible for Medicaid. From Medicaid's perspective, assets that were given away or sold below market value could have been used by the applicant to pay for long-term care out-of-pocket. If Medicaid discovers that an applicant has violated this rule, a penalty period will be instituted.
The penalty period is the amount of time during which the applicant will not be eligible for Medicaid.
The look-back period begins on the date a person applies for Medicaid. In 49 states and Washington, D.C., the look-back period is five years. In California, it is 30 months. So, for example, if you reside in any state other than California and apply for Medicaid on January 1, 2020, your look-back period goes back 60 months to December 31, 2014. Financial transactions made during this period of time will be subject to review. Transactions made before the look-back period will not be reviewed, nor are they subject to penalty.
Many seemingly innocent transactions can lead to a penalty. For example, a college graduation gift to a granddaughter; a vehicle donated to charity; even payments made to a professional caregiver without a formal care agreement in place.
In addition, assets gifted, transferred, or sold for less than fair market value by a non-applicant spouse can violate the rule and result in the applicant being penalized.
To make matters more confusing, while the federal government sets basic parameters for Medicaid, each state is allowed to operate, within these parameters, in its own way. As we have seen, California's look-back period is only 30 months.
Additionally, the "penalty divisor" used to calculate penalties for those who violate the look-back period varies by state.
The penalty divisor is tied to a state's average cost of nursing home care. Some states use a monthly average, while others use a daily average. Similarly, some states don't enforce the look-back period for in-home care, or they don't penalize applicants for small gifts made during the look-back period.
Calculating the penalty period: How the penalty divisor works in practice.
Let's say your local Medicaid agency has determined that you sold your home to your son for $100,000 less than its fair market value within the five-year look-back period.
To calculate your penalty--the amount of time during which you will be ineligible for Medicaid--the agency will divide $100,000 by the average monthly cost of nursing home care in your area. For the sake of discussion, let's use the average monthly cost of a private room in a nursing home in the United States: $8,365. In this hypothetical example, Medicaid would calculate your penalty as follows:
$100,000 ÷ $8,365 = 11.95
Therefore, you would be ineligible for Medicaid for almost 12 months, meaning you would have to cover the cost of nursing home care out-of-pocket for nearly a year -- a significant penalty indeed.
The rules surrounding Medicaid eligibility and the look-back period are complicated. Although some asset transfers are allowed under certain circumstances, and there are ways to make gifts without violating look-back period rules, the risks of doing so improperly are high. We can design a plan to protect your assets against the high cost of long-term care while helping to ensure you receive the quality of care you deserve.