Many times when talking to clients about planning for long term care they tell me that they are aware of something called the “five year look-back period.” Unfortunately, many of these people have no idea what the relevance of this look-back period is. This article will attempt to explain what is meant by that term and why it is such an important concept when planning how to protect your assets from the cost of long term care.
In order to qualify for Medical Assistance (Medicaid) an applicant can only have countable resources that do not exceed $2,400.00 or $8,000.00 if the applicant’s income is not in excess of $2,163.00 per month. With that in mind, for a number of years people about to enter into a nursing home would transfer their assets to family members in order to appear “poor on paper” when applying for Medicaid. The Federal Government has enacted several laws to prevent this from happening by declaring that assets transferred for less than fair market value within a certain period of time prior to applying for Medicaid will result in a penalty. Under current law, the County Assistance Office (which is where Medicaid applications are filed) will look back five years prior to the date of the application to see if any transfers for less than fair market value have been made. (The number of years for the look back period is actually now in a state of flux, but the better rule of thumb is to count on the period being five years.)
As an example, assume that someone transferred $105,196.65 (while not a round number, there is a reason I am using it, as you will see) in assets on January 1, 2012. That person then enters a nursing home on February 1, 2014 and applies for Medicaid. Since the transfer occurred within five years of the application date, the caseworker in the County Assistance Office will have no choice but to assess the legally mandated penalty on the applicant. Unfortunately, it is the severity of the penalty imposed which is why the look-back period is so important.
Under Federal Law, the penalty is assessed when the applicant would have otherwise qualified for Medical Assistance. In other words, after the applicant has exhausted all of his or her resources and is now, in essence, broke. The penalty is calculated by taking the amount of the gift and dividing that by the average daily rate of nursing home care, which is now $288.21. The resulting number is the amount of days that the Commonwealth will not provide Medicaid to the applicant.
Using our example, the $105,196.65 gift will be divided by $288.21, resulting in a penalty period of 365 days. This means that after the applicant no longer has any assets to pay the nursing home he or she will not receive any Medicaid benefits for one full year, leaving the applicant with no resources to pay the home for that period of time. It is clear then how the failure to account for the look-back period when transferring assets can have an enormous financial impact on an applicant and why that phrase is so important to understand.