What is the Medicaid Look-Back Period?  What Penalties, Exemptions & Workarounds Exist?

Page Reviewed / Updated - Sep. 2016

Definition

For an elderly person to be eligible for nursing home care, assisted living or in-home care from Medicaid, they must have limited income and assets. To prevent candidates from simply giving away their money to qualify for Medicaid, the federal government implemented the “look-back period”. The look back is a set period of time prior to the individual’s application during which the Medicaid administering agency reviews all the financial transactions that the senior has made. If a transaction is found in violation of the look back period’s rules, the applicant will be assessed a penalty. Penalties come in the form of a period of time that the applicant is made ineligible for Medicaid. Meaning they will not be able to receive care services paid for by Medicaid for a certain number of months.

A Medicaid applicant is penalized if assets (money, homes, cars, artwork, etc.) were gifted, transferred, given away or sold for less than the fair market value. The reason for this penalty period is that these assets could have been used to help cover the cost of long-term care, if they had not been gifted or transferred.

In 49 of the 50 states, the length of the look back period is 5 years (60 months). As of 2016, the one exception to this rule is California, which has a 2.5 year (30 month) look back period. The look back period begins the date that one applies for Medicaid. For instance, if an elderly individual completes an application for Medicaid on July 15, 2016, then the look back period begins on that date and goes back 5 years to July 15, 2011 (or in California, back to Jan. 15, 2013)

It’s important to note, if a gift or transfer was made prior to the look back period, an individual will not receive a penalty.  

 

Understanding Look-Back Penalties

The penalty for violating the Medicaid look-back is a period of time that one is made ineligible for Medicaid. This period of ineligibility, called the penalty period, is determined based on the dollar amount of transferred assets divided by either the average monthly rate or daily rate of nursing home care in the state in which the elderly individual lives (this is called the penalty divisor).

Example #1
The state in which you reside has an average monthly cost of $4,000 for nursing home care and you gifted $60,000 during the look-back period. This means you will be ineligible for Medicaid for 15 months. ($60,000 gifted divided by $4,000 average monthly cost = 15 months).

Example #2
Over the past five years, a grandmother gave her granddaughter $8,000 / year, which equals $40,000 in violation of the 5-year look-back period. The average daily cost for nursing home care in your state is $200. This means the grandmother will be ineligible for Medicaid for 200 days or approximately 6.5 months. ($40,000 gifted divided by $200 average daily cost = 200 days / 6.5 months)

Example #3
Four years before applying for Medicaid, an elderly woman sells her home to her son for $250,000. During the review, it was discovered that the fair market value of the home at the time of sale was $350,000. She sold the home for $100,000 under its value. The monthly cost of nursing home care in her state is $5,000. Therefore, her penalty period of ineligibility will be 20 months ($100,000 / $5,000 = 20 months).

The penalty period begins the date that one becomes eligible for Medicaid, not the date that the transfer or gift resulting in penalization was made. For example, if you transferred your home to your child on August, 5th, 2014, but didn’t become eligible for Medicaid until March 16th, 2016, your period of ineligibility will begin on March, 16th, 2016.

 

Look-Back Exceptions & Exemptions

Fortunately, there are multiple exceptions to the rules and exemptions made for families in difficult situations. Under these exceptions, applicants are permitted to transfer assets to certain parties during the look-back period without incurring a penalty. Less fortunately, these options are often confusing and difficult to implement without the expertise of a Medicaid planning professional.

Spouses
An applicant is permitted to transfer up to $119,200 (in 2016) to their spouse, if their spouse is not also applying for Medicaid and will continue to live independently. Phrased differently, a non-applicant spouse is permitted to retain up to $119,220 of the couple’s assets. This is referred to as the Community Spouse Resource Allowance. The dollar amount changes annually and there is some variance to this exception dependent on one’s state of residence.

Each state is either a 50% state or a 100% state, meaning the non-applicant spouse (called the Community Spouse) is permitted to retain up to either 50% or 100% of the couple’s assets. The remaining assets are “spent down” on the cost of nursing home care until the individual in need of long-term care meets the asset limit for Medicaid qualification. To clarify, view the table below.

2016 Medicaid Community Spouse Resource Allowance
Couples’ Combined Assets $50,000 $100,000 $150,000 $250,000 $500,000
Amount the “Community Spouse” keeps in a 50% State $25,000 $50,000 $75,000 $119,220 $119,220
Amount the “Community Spouse” keeps in a 100% State $50,000 $100,000 $119,220 $119,220 $119,220

 


Disabled Children
Applicants are permitted to transfer assets or establish trusts for disabled children under the age of 21. This includes children who are legally blind.

Siblings
A home can be transferred to a sibling should that brother or sister own a portion of the home (have equity in the home) and they must have resided in the home for at least one year prior to nursing home placement of the person in question.

Adult Children Caregivers
The “Child Caregiver Exemption,” is designed for adult children who live with the Medicaid applicants (their parents) and serve as their primary caregivers. Under this exemption, the parent can transfer their home to their child without penalty. To learn more about this exemption, click here. https://www.payingforseniorcare.com/medicaid/caregiver-child-exemption.html

Debt Payments
Paying off debts during the Medicaid Look-back Period is also exempt from violation. For instance, paying off one’s mortgage or home equity line of credit is a great way to turn liquid assets into exempt assets.

Transferring assets is a complicated matter and should not be done without first consulting a Medicaid expert. 

 

Common Mistakes and Violations

Gifts
Since the federal government permits U.S. citizens to gift money (as of 2016, as much as $14,000 / year) via the estate and gift tax exemption without paying tax on it, one may not realize that Medicaid does not consider the transaction to be exempt from the Medicaid look-back period. Even gifts for special occasions, such as holidays, wedding and birthdays, may result in penalization by Medicaid. The same holds true for charitable donations. Further complicating matters is that fact the gifting rules change by state.

Lack of Documentation
Even if one sells an asset and receives a value equal to the fair market value, if they are unable to provide documentation of the transaction, they might be found in violation of the look-back period. This is of particular relevance for assets on which the government has a record such with boats, motorcycles or vehicle via registrations.

Irrevocable Trusts
Many people are the under the mistaken assumption that an irrevocable trust, sometimes referred to as a Medicaid Qualifying Trust, is exempt from the Medicaid look-back period. However, this is not the case. A trust is a legal arrangement where an individual (the grantor) transfers assets, and ownership, to a third party, also called a trustee, who then holds the assets for the named beneficiary. (Assets that can be transferred via trusts include stocks, CDs, annuities, cash, and property.) With an irrevocable trust, the grantor cannot change or revoke the trust as opposed to a revocable trust that can be changed. Irrevocable trusts made during the look-back period are considered gifts and therefore are in violation of the look-back period. However, irrevocable trusts made prior to the look-back period are not considered assets.

The term, Medicaid Qualifying Trust, is inaccurately named and often violates Medicaid eligibility, thereby causing considerable confusion. One should take extra caution when hearing this phrase. 

 

Look-Back Variations by State 

Medicaid is a combined federal and state program and as such, so are the rules governing look-back periods. The penalty divisor amount varies by state. That is to say the dollar amount that Medicaid uses as the average cost of nursing home care varies. Some states use a monthly average penalty divisor, while others use a daily average penalty divisor. Another variation, for example, is in the state of New York. The rules governing the transfer of assets under fair market value do not extend to home care (also referred to as community care) but instead only applying to nursing home care. Some states may also allow for small gift exceptions. For instance, Pennsylvania, allows individuals to give up to $500 total / month without being in violation of the Medicaid look-back Period. Please note, this does not hold true for all states.

It is strongly recommended that one consult with a Medicaid planning professional who understands the nuances between states.

 

Application to Different Medicaid Programs

There are many different types of Medicaid programs and the look-back period does not necessarily play in as an eligibility factor in all of them. However, this page is only concerned with those Medicaid programs that relevant to the elderly. The Medicaid Look-back period applies to Medicaid long-term care services. This means that if one is in violation of the penalty period, there will be a period of ineligibility for nursing home care, as well as services under Home and Community Based Services (HCBS) Waivers. Services and supports under HCBS Waivers may include adult day care, in-home personal care, respite care, etc. Having said that, penalty transfers may not extend to all states for community (non-nursing home) Medicaid, such as in New York.

 

Strategies to Avoid Penalties 

In order to circumvent violating the Medicaid look-back period and being penalized, there are strategies that are utilized to help families retain some of their assets or to help them gain Medicaid eligibility. However, it is highly recommended that one consult a professional Medicaid planner prior to proceeding with any of the strategies that follow as they can be exceedingly complex. Disqualifying a loved one is easy to do and difficult to rectify.

1) Caregiver Agreements

Caregiver agreements, also referred to as life care agreements, elder care contracts or long-term care personal supports services agreements, are contracts that lay out the caregiving relationship between an elderly individual and a caregiving relative. This formal agreement allows seniors to compensate their relative for care provided and “spend down” assets without violating the Medicaid look-back period. These contracts also allow seniors to receive needed care that Medicaid does not cover, while also providing family members with needed compensation. Note, caregiver contracts may remain in effect even after the elderly individual enters a nursing home facility, with the caregiver serving as the advocate of the senior.

Careful drafting of the contract (which is generally for the duration of the senior’s life) is imperative and should include the date services began, caregiver’s responsibilities, whether it is shopping for essentials, transportation, meal preparation, or personal care assistance, and the hours a caregiver will work. In addition, the caregiver must keep a log of duties performed, the hours worked each day, and maintain written invoices for the services.

The contract needs to state the amount of compensation (which must be reasonable for the duties provided) the caregiver will receive in return for duties / services provided. The payment for a caregiver agreement is paid in advance. Therefore, the calculation must be figured based on a reasonable life expectancy. When the senior passes away, Medicaid requires any remaining (unearned) compensation to be paid to them.  Read more about caregiver agreements.

2) Medicaid Exempt Annuities

Annuities, also referred to as Medicaid Annuities or Medicaid Compliant Annuities, are a common way to avoid violating the Medicaid look-back period. With an annuity, an individual pays a lump sum in cash and in return they or their spouse receives monthly payments for the duration of that person’s life or for a set number of years. Annuities are Medicaid compliant because they turn assets into income, thereby lowering the assets the Medicaid candidate has to an amount below the Medicaid eligibility limit. Purchasing an annuity during the look-back period is not in violation of Medicaid’s rules. Having said that, each state has slightly different rules with regards to Medicaid annuities and their beneficiaries and there is no shortage of annuity salespersons who may not be well-informed about the Medicaid compliance of their products. Proceed with caution.

Deferred annuities, which mean the investor chooses to delay payments until a specified period of time, are considered assets that can be used towards the cost of long-term care and therefore cannot be used a strategy to avoid violating the look-back rule.

3) Undue Hardship Waiver

Via an Undue Hardship Waiver, the Medicaid Penalty Period can be waived. For instance, if an individual has violated the Medicaid look-back period but will be without basic needs, such as food and shelter, due to this violation, one can request this waiver. However, one must first exhaust all methods of recovering the assets that were transferred, including legal options. It’s important to note, it is very difficult to be granted an Undue Hardship Waiver.

4) Professional Medicaid Planning Assistance

The Medicaid Look-back Period is a very serious and complicated matter. The best way to avoid violating this period and receiving a penalty of Medicaid ineligibility is to consult a Medicaid planner prior to gifting or transferring any assets. A Medicaid planner can also offer assistance if you have violated the look-back period. One can learn more or be connected with a Medicaid planner here.