Thomas Cothran is an attorney who practices elder law and medicaid planning in Lexington, KY. This article is for informational use only. You should speak to an attorney before taking action. Note that any answers apply to Kentucky only. Medicaid regulations can differ state by state.
Q. My father gave me real estate last year. Now he’s going into a nursing home, and they are saying that gift creates a penalty period. Is he disqualified from Medicaid? What do we do?
A. As a general rule, when someone gives a gift within five years of applying for Medicaid, there is a penalty period. A penalty period is not a criminal offense. It simply means that there is a certain period of time for which Medicaid will not pay for nursing home care.
A few general facts to keep in mind: Medicaid is not Medicare. Medicaid is generally superior to Medicare for nursing home care. The catch is that Medicaid is harder to qualify for. That’s why Medicaid planning attorneys exist: to qualify people for Medicaid while preserving their assets to the fullest extent permitted by law.
How Medicaid’s Penalty Periods Work
Medicaid’s penalty period is calculated by taking the value of the gift and dividing it by the transferred resource factor. Kentucky’s 2014 transferred resource factor is $196.52 per day. Medicaid’s penalty period is calculated by dividing the value of the gift by the transferred resource factor. Note that the annual exemption amount for gift tax purposes does not exclude a gift from being counted by Medicaid.
Let’s take a simple example. Alice gives her son, Bob, a $20,000 gift on January 1, 2014. On February 1, 2014, she qualifies for Medicaid, but for the gift. The gift generates a penalty period of approximately 101 days. This means that Medicaid will not pay for nursing home care during that penalty period.
Options When Medicaid Assessed A Penalty Period
So what are your options? Bob could return the $20,000 gift to Alice. Under federal law, the return of a gift eliminates the penalty period. The problem is that Alice now no longer qualifies for Medicaid, because her assets exceed the allowable limit.
A second option is that Bob could pay for Alice’s care out of the $20,000 gift. One problem that frequently arises, however, is that the cost of the care will exceed the gift.
A third option is for Bob and Alice to use a Medicaid planning technique called gift and return. This involves invoking the penalty period and then returning the gift in such a way that a sizeable percentage of the gift is saved.
It is important to use any of these options under the supervision of an attorney.