Grandparents often love to shower their grandchildren with money and expensive gifts. These wonderful heartfelt gifts may cause joy in the moment, but some of them may be costly down the line.
Why? State and federal laws penalize some gift-givers for making “uncompensated transfers.”
What Are Uncompensated Transfers?
Federal law prohibits states from paying long-term care expenses for people who have made uncompensated transfers within a specified time before applying for Medicaid. Under Medicaid’s strict criteria, an uncompensated transfer includes any cash or other property that a person transfers to someone else without receiving full market value in return. For example, a “sale” of a $100,000 house for $1 is a $1 sale and a $99,999 uncompensated transfer.
Uncompensated transfers can be large or small and can take many forms, including:
- cash gifts
- gifts of vehicles
- gifts of jewelry
- buying someone a cell phone
- paying someone else’s bills
- paying someone else’s medical expenses
- transferring real estate as a gift or a below-market sale price
- selling any property below its fair market value
- paying someone’s college tuition
- paying for a grandchild’s wedding
If someone gives away money or other property shortly before needing nursing home care, the state Medicaid agency will delay paying the person’s nursing home expenses for days, months, or years. The purpose of the Medicaid look-back period is to find and penalize Medicaid applicants for uncompensated transfers.
Potential Need For Nursing Home Care
It’s difficult to worry about uncompensated transfers when all the elders in your family are happy and healthy. Unfortunately, things can happen suddenly that require either hospitalization, rehabilitative care, or a permanent nursing home admission. Consider these scenarios:
- Your retired mother is rushed to a hospital after a negligent driver crashes into her car. She has severe and debilitating injuries.
- Your grandmother falls at home and severely injures her hip, requiring full-time rehabilitative care.
- The police call because your dad is wandering the streets looking for you. You can’t watch him every minute and realize he needs nursing home care.
Paying Without Medicare Or Medicaid
Most residents begin paying for long-term care services out of their own pocket. The average annual cost of nursing home care in Indiana is more than $80,000 for a semi-private room (slightly less in Southern Illinois). Medicare does not cover most placements in nursing homes, so nursing home residents or their families must pay the necessary costs of long-term care.
Medicare also does not pay for hospital facilities on a long-term basis. Nursing homes themselves do not take regular health insurance unless your elder family member happens to have a long-term care policy.
Eventually, the money being used to pay for long-term care runs out. Savings accounts, stocks and bonds, property, and any other revenue sources, may all need to be used just to keep up with nursing home care expenses. Real property may need to be sold. All sales and transfers must be at the fair market value, or Medicaid investigators will look back over the last five years and flag them as uncompensated transfers. The look-back period is extensive and detailed.
2021 Medicaid Income And Assets Criteria
The state criteria for a single nursing home resident’s Medicaid eligibility require that the person cannot have more monthly income than $2,382 in Indiana (or more than the actual monthly nursing home fees in Illinois) and cannot have countable assets of more than $2,000 (assets that are not exempt from inclusion as “resources”).
If a married couple needs nursing home care, then the income restriction applies to each spouse, and the couple cannot collectively have resources worth more than $3,000.
If one spouse needs Medicaid (the “institutional spouse”), then the institutional spouse cannot have monthly income over $2,382 (again, actual monthly nursing home costs in Illinois) or resources above $2,000. However, an Indiana spouse living independently (the “community spouse” ) does not have to meet income requirements and can possess up to $130,380 in assets (Illinois requires the community spouse to pay some income for the institutional spouse’s care, and the maximum resource allowance is $109,560.00).
Medicaid Look-Back Period And Transfer Penalties
Medicaid pays for an eligible Medicaid recipient’s nursing care services in the home, assisted living facility, or a long-term care facility. However, Medicaid eligibility is not automatic for everyone.
State Medicaid officials can review (“look back” over) a Medicaid applicant’s old bank statements and other financial records for the five years preceding the Medicaid application date. Although Indiana applicants don’t always have to produce financial records for all five years, Indiana Medicaid officials can require a full production of records. Illinois applicants must produce the full five years of records.
If the application process reveals uncompensated transfers, the transfers will trigger a “transfer penalty.” The transfer penalty will deprive the applicant of Medicaid assistance for a time duration related to the total value of the applicant’s uncompensated transfers during the look-back. The transfer penalty begins when the applicant needs the level of care provided in a nursing home and satisfies the income and resource eligibility requirements.
Indiana calculates the length of a transfer penalty by dividing the total value of uncompensated transfers by the average cost of a one-month stay in a nursing home, which Indiana publishes on its Medicaid policy manual website. Illinois calculates the transfer penalty similarly, but it has multiple types of long-term care environments and applies different standards for the various environments. As of July 1, 2020, the Indiana average nursing home cost was $6,681, so a $66,810 uncompensated transfer would trigger a 10-month penalty ($66,810 ÷ $6,681/month = 10 months).
Transfers Not Intended To Qualify For Medicaid
Not all uncompensated transfers trigger transfer penalties. The federal rule applies transfer penalties for transfers made for the purpose of qualifying for Medicaid. If a Medicaid applicant made uncompensated transfers for reasons other than qualifying for Medicaid, the transfer penalty rule does not apply. Examples of uncompensated transfers that don’t trigger transfer penalties include:
- assets taken by theft or fraud (a criminal complaint may be necessary)
- a regular pattern of gifts such as church tithes
- regular pattern of gifts for holidays or special occasions
Medicaid officials consider gift patterns on a case-by-case basis, and it is not always easy to predict whether officials will accept evidence of a transfer purpose other than to qualify for Medicaid.
Purpose Of The Five-Year Look-Back Period
The five-year look-back requirement is only in place for nursing home level of care. Congress established the look-back and transfer penalty system to limit government responsibility for the ballooning costs of long-term care in hospitals, nursing homes, and rehabilitative facilities. The look-back and transfer penalty system ensures that people use private funds to pay for some of their long-term care services instead of giving away the assets and burdening the government-funded Medicaid system.
State agencies train Medicaid officials to discover and assume that unexplained cash transfers are penalizable uncompensated transfers. So, they will flag any unexplained bank account withdrawals. They also compare income sources to deposits to catch people depositing less than their income amounts. Increasingly, governmental computer systems are gathering account information through multiple sources to verify whether Medicaid applicants are disclosing their financial information fully and truthfully.
People should maintain detailed records about property sales. If an item is not sold for its fair market value, it will at least partially be deemed an uncompensated transfer. For example, if a car is sold for $10,000 when its fair market value is $20,000, caseworkers may consider that extra $10,000 to be an uncompensated transfer of assets.
Transfer To Trusts
A transfer to an irrevocable trust will usually trigger a transfer penalty. Elder law attorneys sometimes help clients establish and fund irrevocable trusts as carefully planned asset protection strategies. However, if people transfer property without calculating the transfer penalty consequences, they may create financial crises that prevent them from receiving essential health care. So, we often tell people, “don’t try this at home kids!”
Refusing Future Benefits
A person does not have to own property to make an uncompensated transfer. Federal Medicaid law applies transfer penalties to people who refuse income or assets that they are entitled to receive. For example, if a Medicaid applicant disclaimed inheritance from a deceased family member within five years of the applicant’s Medicaid application, the value of the disclaimed assets may trigger a transfer penalty.
Hiring An Elder Law Attorney For Asset Protection Planning And Long-Term Care Medicaid Applications
Medicaid laws change almost every year, and state Medicaid agencies often revise their policies and procedures with little or no notice. So expert elder law attorneys must monitor the Medicaid system vigilantly to serve their clients professionally. The attorneys of Hawkins Elder Law have almost three decades of experience helping clients plan and implement Medicaid planning strategies for asset protection and Medicaid eligibility.
About the Authors
Jeff R. Hawkins and Jennifer J. Hawkins co-author this blog with Thomas E. Hynes, a lawyer admitted to practice in Pennsylvania, New Jersey and Florida who has a background in estate planning and elder law. Jeff and Jennifer are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers. They are also active members of the Indiana State Bar Association and the Indiana Chapter of the National Academy of Elder Law Attorneys (NAELA). Jeff is also a member of the Illinois NAELA Chapter.
Jeff is a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation. He is also a member of the Illinois State Bar Association and he served as the 2014-15 President of the Indiana State Bar Association.
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