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Medicaid documentsMedicaid is one of the government safety nets that helps seniors pay for their care. Long-term care is a necessity for many seniors as they age and can be very expensive. Medicaid helps to pay for long-term care, but it requires that you exhaust your personal resources before payments begin. To prevent seniors from giving away money or resources to friends and family, Medicaid uses a 5-year lookback of their financial transactions. Attempting to hide money can lead to serious penalties. Here’s how to avoid Medicaid 5-year lookback penalties.

Consider working with a financial advisor as you prepare for meeting your retirement expenses.

What Is the Medicaid 5-year Lookback?

The Medicaid 5-year lookback is a device used by the government to ensure that you haven’t given away your money or resources. It seeks to prevent a scheme where a senior has the government pay for their care instead of using their money or other assets.

When you apply to Medicaid for long-term care benefits, they will review recent financial transactions for disallowed transfers of money or property. The lookback period in 49 of the 50 states is five years and begins as of the date of the Medicaid application. However, in California, the lookback period is only 2.5 years (30 months). If Medicaid finds ineligible transactions, the applicant will be assessed a penalty.

How Is a Medicaid Lookback Penalty Calculated?

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The lookback penalty is based on the total amount of ineligible transfers and the average private patient rate for nursing home care in your state. This average rate is also known as the “penalty divisor.” The Medicaid lookback penalty is calculated by taking the total of the ineligible transfers and dividing that by the penalty divisor. The result is the number of months that the senior is excluded from receiving Medicaid payments for their long-term care.

Here’s an example that illustrates how the lookback penalty works. A senior makes $66,000 in ineligible transfers over the last five years. In their state, the average private patient rate is $6,000. When you divide the transfers by the penalty divisor, their “penalty period” is 11 months. The penalty period is the time in which the senior is ineligible for Medicaid and there is no maximum penalty limit.

Allowable Transfers Under Medicaid Rules

While there are penalties for ineligible transfers, there are ways to avoid the Medicaid 5-year lookback penalties. By following these rules when transferring assets, you will not be hit with a penalty:

  • Community Spouse Resource Allowance (CSRA). The limits for CSRA vary by state, but this rule allows you to transfer up to $130,380 to your spouse as long as they continue to live independently.
  • Disabled children. You can transfer assets to a disabled child who is under 21 to help pay for their care. A trust can also be established in their name, which is generally the more prudent option.
  • Siblings. A sibling that owns a portion of your home and has been living there for at least a year may receive your interest in the home without penalty.
  • Adult children caregivers. Adult children who live with you and are your primary caregiver for at least two years prior to your Medicaid application may receive your home without penalty.
  • Paying off debt. You can pay off an unlimited amount of your personal (or joint) debt without violating the Medicaid lookback rules. This includes paying off your mortgage or HELOC on a residence that you may be eligible to transfer to another person.

While these strategies are permitted by Medicaid, it is best to speak with a Medicaid expert before initiating any transfers. Rules change on a regular basis and exemptions can be complicated. You don’t want to be penalized for misunderstanding a rule or skipping a small step that is easily overlooked.

Common Mistakes with Medicaid Lookback Rules

When attempting to transfer money to your family and friends, it is easy to make mistakes that run afoul of Medicaid lookback rules. These are some of the most common mistakes that you can make that result in unexpected penalties:

  • Annual gifts. While people can make annual gifts of $15,000 that are excluded from gift and estate taxes, these gifts are not exempt under Medicaid lookback guidelines. Charitable donations may also affect you negatively and increase your penalty period.
  • Lack of documentation. It is critical to document anything that involves paying money, selling assets, or gifting property. These documents can prove that the transaction was appropriate and at “arms-length.” For example, when selling an asset, it is important to have proof that you sold it at market value. This prevents you from being penalized as if you sold it below market or gave it away.
  • Using an irrevocable trust. When you place assets into an irrevocable trust, you cannot get them back. Under Medicaid lookback rules, trust transfers during the lookback period are considered a gift to the trust and result in a penalty.

Transfering Assets so Medicaid Covers Long-Term Care

In order to safely transfer your assets and get Medicaid to pay for your long-term care, use these strategies:

  • Formalize a caregiver agreement. While you cannot gift a friend or family member money, you can pay them a reasonable rate for providing care to you. This allows you to spend down your assets, receive the care you need, and compensate a caregiver for their time and effort. The agreement must be a formal document that includes the date of service, responsibilities, work hours, and compensation. It can be helpful to have an attorney draft the document for you.
  • Purchase a Medicaid-exempt annuity. When you purchase an annuity, you convert a lump sum of cash into a stream of income that you cannot outlive. Generally, purchasing a Medicaid Annuity or Medicaid Compliant Annuity does not violate Medicaid lookback rules, but each state is different. Consult with a licensed insurance agent to find an annuity that qualifies for an exemption.
  • Buy an Irrevocable Funeral Trust. Medicaid allows seniors to set aside a small amount of money for the sole purpose of funeral and burial costs. These limits vary by state and can be purchased for both the applicant and their spouse as a way to spend down their assets.

The Bottom Line

"LONG TERM CARE" sign being held by a doctorMedicaid steps in to help seniors pay for long-term care when they do not have enough money to personally pay for it. There are rules preventing seniors from transferring money to friends and family to avoid using their own money. Medicaid analyzes up to five years’ worth of financial transactions to ensure that assets were not transferred illegitimately. If assets were found, the applicant would be prohibited from receiving Medicaid benefits using a “penalty” formula. There are eligible strategies to transfer assets, but you must follow specific rules. It is best to work with an attorney and a financial advisor to create a plan before making any transfers.

Tips on Getting Medicaid Help for Retirees

  • Not having enough income in retirement is one of the biggest fears people have. A financial advisor can help you build a portfolio to meet your needs and calm your fears. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Medicaid covers long-term care costs, but it is better to have the money to pay for your medical needs. Investing for retirement can help you stay independent and in control of which providers that you choose. Our retirement calculator provides a personalized look at how much income you can expect in retirement.

Photo credit: ©iStock.com/designer491, ©iStock.com/cbies, ©iStock.com/Maksim Labkouski

Lee Huffman
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