Everyone has heard of the 5-year lookback rule for Medicaid.  Some people think that the lookback period is 7 years; some think it is 10 years.  It is actually 5 years under present law.  Regardless of the actual lookback period, one thing is certain: even if you are on the threshold of needing Medicaid, there are most likely planning opportunities.  Yes, I am saying that even if you are within the 5-year lookback period, you can still preserve at least some of your assets for your spouse and children.  (I want to emphasize that what follows is New York law.  The rules may be different in other states.  As always, whether you live in New York or not, you should not rely on an article about Medicaid for legal advice but should contact an attorney who concentrates in elder law to get advice that is specific to your situation.)

Let’s explain how the 5-year lookback works.  When one applies for Medicaid, the Medicaid agency will demand 5 years of the Medicaid applicant’s financial statements.  They will want to see bank statements, brokerage statements, IRA statements, life insurance policies, deeds and so on for both spouses for the past 5 years.  If the Medicaid agency sees that an uncompensated transfer (a gift) has been made, that is not an exempt transfer, they will impose a penalty.  The penalty is the number of months that the Medicaid applicant will be ineligible for Medicaid services.  The penalty is determined by dividing the fair market value of the asset that has been transferred by the average monthly cost of a nursing home in the Medicaid applicant’s region.  For example, if one transferred $200,000 and the average monthly cost of a nursing home where she lives is $10,000, the penalty period would be 20 months (200,000 / 10,000).  That is the amount of time that the nursing home applicant would be ineligible for Medicaid services in our example.

How do we deal with this situation?  One way, would be to combine a promissory note with gifting.  The gift causes a penalty period but the loan is a compensated transfer so it does not cause a penalty period.   The loan is used to pay the nursing home during the penalty period.  By way of example, John applies for Medicaid. Prior to applying for Medicaid, he made a gift to his children of $50,000.  This caused a penalty period of 5 months during which time John will be ineligible for Medicaid.  However, John also made a loan to his children of $50,000, which will be paid back over the 5-month period that John is ineligible for Medicaid.  Thus, in our example, $50,000 was preserved for John’s family.

The actual planning is more complicated than suggested above.  The percentage of assets that can be preserved depends on various circumstances, such as the actual cost of the nursing home and the individual’s income.  However, it is not possible in a blog post to give you more than a general understanding of the concepts involved.

There are times when the above planning is not necessary.  For instance, the 5 year look back period only applies to nursing home applications.  If the individual is seeking home care or assisted living, the 5-year lookback period does not apply.  Also, there may be exempt transfers available that would not cause a penalty period.  Some examples would be transfers to spouses or disabled or blind children.

As you can see, even if the individual is in immediate need of Medicaid, there are still planning opportunities.  Medicaid planning is very complicated and you should have a well-qualified elder law attorney help you through the process.