Your mother cannot just give you all of her assets and immediately qualify for Medicaid. Most people believe that it is against the law to transfer assets in order to qualify for Medicaid long-term care. This is not quite true. While such a strategy is lawful, it has several major downsides.
To summarize, transfers that are made during a recent period of time called a lookback period will result in a transfer penalty, which delays Medicaid eligibility by a duration that depends on the total value of transfers. This penalty exists to prevent someone from waiting until he or she is about to enter a facility to transfer all assets to his or her loved ones.
Before I continue, I would like to clear up some confusion. I often see rules for Medicaid eligibility conflated with rules for bankruptcy and federal gift taxes. The following addresses the two most common errors:
- Transfers for Medicaid purposes and bankruptcy purposes both have 5-year look-back penalties, but their applications are vastly different.
- Many of my clients also confuse Medicaid gifting allowances with federal gift tax rules. A person can transfer up to $15,000 a year without having to report it to the IRS as a gift. However, when it comes to Medicaid, any amount given must be reported, although gifts below $200 within a calendar month are usually considered too small to result in a transfer penalty.
The Lookback Period
The lookback period is the timeframe in which someone’s transfers are evaluated for Medicaid eligibility purposes. Currently, the lookback period encompasses the month in which the Medicaid application is filed, as well as the sixty calendar months that precede it. All transfers that are made during this time are presumed to be a gift given in order to qualify for Medicaid. The burden falls upon your mother to show that an exception applies, which I will explain below.
The Transfer Penalty
Unless an exception applies, any assets, funds or property your mother or her spouse transfers for less than fair market value will result in a period of ineligibility for Medicaid benefits. To be exact, your mother will be ineligible for Medicaid for one day for every $213.71 (as of September 2019) that she gives away. The period of ineligibility applies only to gifts that are given during the “lookback period.”
No matter when a transfer occurred during the 60-month lookback period, the ineligibility period does not begin until your mother is in a nursing home and otherwise meets all the requirements for Medicaid eligibility. Under the federal statute, Medicaid eligibility begins on “the date on which the individual is eligible for medical assistance under the State plan and would otherwise be receiving institutional level care”.
Here is an example of transfer penalties in practice. Your mother decides to give you $100,000 on August 4th, 2018. Your mother then proceeds to go into a nursing facility on November 20th, 2020. She applies for Medicaid on that date and is eligible; this is when the penalty kicks in. The penalty would be $100,000 divided by $213.71 for a total of 468 days. Your mother would thus be barred from Medicaid benefits until March 3, 2022.
Given the severity of the penalty incurred, you can easily see that gifting property to anyone other than a community spouse for SPRA is a poor strategy, with important exceptions that we will cover later.
A number of parents plan to gift their property to their children and then wait out the 60-month lookback period before applying for Medicaid. There are problems inherent with this particular strategy as well.
- The person to whom your mother gives a gift could die, thereby leaving all of her property, via a will or beneficiary designation, to someone who runs off with the money.
- The money could be taken by a spendthrift spouse.
- If the recipient has creditors, the creditors could lay claim to the money.
- If the recipient owes back taxes, the IRS could take any available funds.
- The recipient could have a dire need and use the money out of pure necessity.
- The laws could change, extending the lookback period.
Exclusions from Gifting
Your mother can make the following transfers without penalty:
- Transferring a home: Your mother could transfer her interest in her home to:
- Her spouse;
- Her child who:
- Is under the age of 21;
- Meets the requirements of disability under SSA; or
- Resided in the home for at least two years before she was institutionalized and provided care to your mother that delayed her institutionalization.
- Her sibling has an interest in the home and has resided in the home for at least one year.
- Spousal benefit: Your mother may transfer to her spouse or to a third party for the sole benefit of her spouse.
- Disabled individuals: Your mother may transfer assets into a trust for the sole benefit of her disabled child or another disabled individual under the age of 65.
- Transferring assets at fair market value.
- Assets transferred below fair market value that has been returned.
- For a purpose other than to qualify for Medicaid.
- Undue hardship: Your mother will not undergo a transfer penalty when it would cause undue hardship relating to medical care, food, shelter, clothing, or other life necessities.
Notes: Tithing is not an exempt transfer, but HHSC does not penalize these transfers, as long as they end when the application is filed.
 42 U.S.C. section 1396p(c)(1)(D)(ii); Medicaid for the Elderly and People with Disabilities Handbook section I-5200.