Timing is everything…
In understanding the ins and outs of Medicaid and divestment, timing is everything.
Divestment is the concept that if you give away your assets with the intention of becoming eligible for Medicaid, the gift will cause you to be ineligible for Medicaid for a period of time. This is pretty easy to grasp, why would any government poverty program allow you to give away a million dollars today, and apply and qualify tomorrow? (Well, some government programs do allow you to give away a million dollars and qualify immediately – such as Veterans’ Aid and Attendance Pension – and even Medicaid allows you to do that in a limited situation such as when the gift is for the benefit of a disabled child–but that is not what we are here to talk about today. In my experience, most millionaires want to keep their money.)
Even though the Medicaid rules are intended to penalize intentional divestment, as a practical matter, if an individual has given away any substantial sum of money while his or her health has been declining, it is going to be viewed as a divestment by a Medicaid caseworker. There are cases where we have successfully argued that a particular gift was not to become eligible for Medicaid, but that does not happen without a bit of a struggle.
So, the basic timing in divestment cases goes like this:
Timing issue number one: FIVE-YEAR LOOK-BACK. If you give something away, and at any time within five years after that gift you need to apply for Medicaid in a nursing home, or for Family Care to provide home care or assisted living benefits, you will be required to disclose the gift on your application. That five year is called the “look back period.”
Because of the “look-back period,” people who divest and apply too soon could be hit with a large penalty, and people who wait five years will have no penalty. This is why, in planning involving the transfer of assets to an irrevocable trust, it becomes irresponsible if the person does not have enough money outside of the trust to be secure for five years. That is also why, if the plan is to wait out the look-back period, it is critically important to time the application so that it is not done too early.
A gift within the look-back period is likely to create a “penalty period,” which leads us to time issue number two: THE PENALTY PERIOD. This is also referred to as the “period of ineligibility.” The penalty period is a calculation that uses the amount gifted and divides it by a figure that is updated “sort of” annually (it does not always get changed.) For example, a gift of $20,000 that is made within the lookback period will create a penalty period of 82 days.
If you are newly applying for Medicaid that penalty period is imposed beginning when you:
1) are in the nursing home, (or when you apply for Family Care in the community);
2) have spent your assets down to the level at which you qualify for Medicaid ($2,000 for an individual, and usually somewhere between $50,000 – $119,240 for married couples in most cases); and
3) apply for Medicaid.
For people already on Medicaid who divest money, the timing is even more complicated and I won’t go into it here. The penalty period will mean that even though you qualify for the Medicaid program, you still need to pay privately for the duration of the penalty period.
“Well, how am I supposed to do that if I only have $2000?”
Good question! The answer is: You can’t! Particularly if you are single. Unless…..You have planned carefully.
Careful planning is the reason that in some cases, where a person has gifted money, it makes sense to take steps to further reduce that person’s assets immediately so that an application for benefits can be made and a penalty period served out. (Which, I realize, is exactly the opposite of waiting out the five-year look-back period, and so this has to be carefully considered.) One such case would be where a person is in assisted living but anticipated to move to a nursing home setting. In that case, instead of waiting to gradually spend down all the person’s money, apply for Medicaid in a nursing home, and then get hit with a divestment penalty, it would make sense to have that application completed while the person is in assisted living, even if the assisted living facility does not take Family Care benefits! That way, the penalty period will be over before the high cost of nursing home care sets in.
In other cases, where a person has gifted money and then finds him or herself in need of nursing home care, we advise the family that instead of gradually spending down money, and then again ending up applying for Medicaid and facing a penalty period, the family should immediately reduce assets by using a vehicle such as an annuity or loan, whose payout is carefully timed so that the income will cover the cost of the penalty period.
These techniques are not “gaming” the system. These people are “paying the penalty” for having divested money. The difference is that when clients understand how the timing works, there are steps they can take instead of simply waiting and being hit with a penalty when neither the client nor his or her family can afford it.
And I won’t beat around the bush – timing is everything in one more respect: getting in to see a qualified elder law attorney sooner rather than later. This is because people who have good advice will minimize the impact of divestment. People who don’t will end up simply spending down all of their funds and will be hit with an unworkable penalty.
