The Medicaid five year look back period often intimidates applicants, partly because there exists some confusion about its purpose.
When Congress established the penalty period for which coverage would be denied to those otherwise eligible for Medicaid, it resulted in both controversy and confusion. It is true that there are specific asset guidelines for Medicaid qualification; however, once it’s understood, it becomes clear as to why Congress opted for such a strict guideline. Rest assured, our lawmakers don’t expect us to become poverty-ridden in order to qualify for Medicaid.
Medicaid is designed to help people in need. It’s administered on the state and sometimes local level, so the rules and benefits vary.
That Pesky Five Year Look Back Period
Generally speaking, Medicaid is designed to cover long-term care once the individual’s funds and assets are extinguished. In simple terms, if you have $200,000 in savings, you are expected to use those savings to pay for your care – once your savings are gone, then Medicaid will kick in. This highlights why so many of us seek long-term planning to protect at least some of our assets. No one wants to work hard throughout their lives and have nothing left to leave for their children and grandchildren.
Here’s the rub: when you apply for Medicaid, any gifts or transfers of assets made within five years of the date of application are subject to penalties. Anything outside the five year window is not subject to those penalties.
For example, say you made gifts of $10,000 per year to your grandson in 2011, 2012, and 2014. All of those gifts are subject to the look back period, if you applied for coverage today, and those gifts will result in a penalty where Medicaid is concerned. That said, you don’t have to worry about the gift taxes since they’ve not exceeded the annual exemptions for the relative years.
It’s all About Planning
How to avoid it? This is why you often hear estate planning lawyers and financial consultants talk about long term planning. What if you have, say, $70,000 you want to leave to your son? You can gift the maximum each year up to the annual exclusion amount (currently it’s $14,000 or $28,000 if you’re married). He may be able to put those funds to good use today by buying a home, starting or growing his business, paying for college or anything else he chooses. You’ll get to see the happiness your gift brings and you don’t have to worry about Medicaid penalties (provided you don’t apply for Medicaid within that five year period following your final gift) and you get the added benefits of big tax savings.
Why the Rule Anyway?
The dreaded penalty period came about when Congress decided it was time for a new law that would specifically address those fears associated with passing off assets and then reclaiming them after an applicant qualified for Medicaid. The first purpose is to determine whether or not an inordinate amount of asset transfers prior to the person’s application. If so, penalties are designed to kick in. It’s impossible to provide specifics on what those penalties are since they’re based on a percentage of how much was actually given away, along with slightly different state by state specifics.
Concerned about the Medicaid five year look back period? Contact our offices today. We can help guide you through the application process.