Medicaid imposes an ineligibility period for an institutionalized individual if the individual or the individual’s spouse disposes of assets for less than fair consideration at any time during the “look-back” period. The look-back period is the sixty-month (five-year) period prior to the application for Medicaid for outright transfers and for certain transfers into or out of a trust. (For transfers that were completed before February 8, 2006, the look-back period for outright transfers is only thirty-six months, except for certain transfers involving trusts, which carry a sixty-month look-back period.) The term “assets” includes all income and resources of the individual.

Upon application, the county will determine if an applicant transferred resources without fair consideration within the five-year period prior to filing his or her Medicaid application.

The period of ineligibility is calculated as the amount of the transfer divided by the average cost of nursing home care in Colorado ($6,623 in 2012). Under theDeficit Reduction Act (DRA), states are required to impose partial months of ineligibility, and may no longer “round down.” Therefore, if this calculation is not a whole number, then the decimal amount is multiplied by 30 days to determine the additional daily penalty period. For example, if a penalty period is calculated at 4.2 months, this would amount to a penalty period of 4 months and 6 days (30 days x .2 = 6 days).

The DRA also permits states to aggregate all transfers on or after April 1, 2006 during the five-year look-back period in calculating a single penalty period, based upon the total amount of all such transfers.

Under the old Medicaid rules, the penalty period began running on the first day of the month in which the transfer was made. However, under the new law applicable to transfers made on or after February 8, 2006, the penalty period does not begin until that later of the first day of the month in which the transfer was made or the first day the applicant is receiving services in a nursing home or under HCBS and the applicant is eligible for Medicaid, but for the transfer. Eligibility ” but for the transfer” must be based on a submitted Medicaid application. This means that before the penalty period begins to run, the applicant’s resources must already have been spent down to eligibility levels and a Medicaid application must be filed and approved, but for the applicable transfer penalty.

There is no limit on how long the penalty period can be. Any transfer that occurred during the five-year look-back period will be imposed in full.

When the amount transferred is large enough to trigger a penalty period of five years or more, the applicant must make certain to retain sufficient means to pay privately for nursing home care during the entire five-year look-back period. If the applicant does not apply for Medicaid until after the five-year look-back period has expired, no transfer penalty will be imposed.

Even when the amount transferred results in a penalty period of less than five years, it is important for the applicant to ensure a means to privately pay for his or her support and care during the penalty period. Prior to February 8, 2006, this was usually accomplished by employing a “half-a-loaf” strategy.

The half-a-loaf strategy essentially involved making a gift of a portion of excess resources, knowing that a penalty period would be imposed. Since the length of the penalty period could be determined in advance, and the penalty period always began to run as of the first day of the month in which the transfer was made, it was relatively simple to calculate how much the applicant could safely give away (the “transfer amount”); and the amount the applicant would require to hold back (the “hold-back amount”) to pay for support and care during the penalty period.

The hold-back amount could simply be held in an interest-bearing account until needed. If the transfer and hold-back amounts were calculated correctly, the holdback amount would be exhausted at the same time as the penalty period expired, allowing the applicant to qualify for Medicaid at that time.

The harsh treatment of transfers under the DRA makes gifting under the traditional half-a-loaf strategy very dangerous if not done correctly. Since all nonexempt resources of the applicant must be spent down to the $2,000 level before the penalty period starts to run, the applicant could be left in a nursing home with no means of payment during the penalty period.

To avoid the harsh consequences of gifting under the DRA, some means must be used which will both provide for private payment during the penalty period and not be considered an available resource that will delay the start of the penalty period past the date on which long term care services begin. Using a strategy that would meet these new requirements could still allow for half-a-loaf planning if the holdback amount could be structured in such a manner as to avoid being considered an available resource. These strategies might involve the use of Medicaid-exempt annuities, which will be discussed in more detail later.

Exempt Transfers

The following specific types of transfers will not incur a penalty period:

Transfers between spouses.

Transfer of the home to either (a) the Medicaid recipient’s child who is under 21, blind, or permanently and totally disabled, (b) the recipient’s sibling who has an equity interest in the home and who was residing in the home for at least one year immediately before the date the individual entered the nursing home, or (c) the recipient’s son or daughter who was residing in the home for at least two years immediately before the date the individual entered the nursing home and who provided care that permitted the individual to reside at home rather than in an institution. Applicants are required to obtain letters from their doctors stating that the care that the son or daughter provided allowed the individual to remain at home instead of in a nursing facility.

Transfer of any assets (other than the home) either directly or to a trust established solely for the benefit of the Medicaid recipient’s child who is under age 21 or is blind or permanently and totally disabled, or to a trust established solely for the benefit of an individual under 65 years of age who is disabled.

Transfers of assets into a Medicaid-exempt Special Needs Trust or Pooled Trust (so long as the transfers are completed before the beneficiary reaches age 65) and transfers of income into a Medicaid-exempt income trust (Miller Trust).

Transfers where the individual can justifiably show that the Medicaid recipient intended to dispose of the assets, either at fair market value or for other valuable consideration, the assets were transferred exclusively for a purpose other than to qualify for Medicaid, or all assets transferred for less than fair market value have been returned.

The DRA adds or revises three additional categories of exempt transfers:

1. Transfers to purchase actuarially-sound, irrevocable and non-assignable immediate annuities payable to the Medicaid recipient if the state is named as the death beneficiary up to the amount of Medicaid benefits paid to the annuitant. The state may be named as a second death beneficiary behind the recipient’s surviving spouse or minor or disabled child.

Transfers as loans if the repayment term is actuarially sound, payments are in equal amounts for the life of the loan (no deferrals or balloon payments) and there is no provision for cancellation on the death of the lender.

Transfers to purchase a life estate in another person’s home if the purchaser actually lives in the home for one year after the purchase.