Don’t “avoid the 5 year Medicaid lookback period.” Plan for it instead.

Many clients come to us asking the question, “How can I avoid the Medicaid 5 year lookback period?” We think that’s the wrong approach. We want you to plan ahead to avoid any Medicaid eligibility penalties.

How the Medicaid 5 year lookback period could cost you.

When Edna turned 82 she felt like she had enough money and she wanted to help her kids now rather than wait until later. She began to give the maximum legal amount, according to the IRS, that she could give tax free to each of her three children, $15,000 per year (in 2021, up to $16,000 per year in 2022). She did this for each of the last five years totaling $210,000 passed to her children tax free.

What Edna didn’t know will cost her. She was unprepared for the surprise period of ineligibility that she would get from Medicaid.

This past year Edna’s health declined. She began to forget simple things and had difficulty taking care of herself. After a neurological exam, Edna’s doctor diagnosed her with dementia after which she was determined to meet the functional requirements for Long-Term Care Medicaid.

Why doesn’t Medicare pay for long term care?

Medicare will only pay for short stays designed to rehabilitate someone to return home. After someone is determined to need permanent long-term care, Medicare is not an option. Once Enda, her family, and her doctor determined that Edna would need full time care, Medicare no longer pays.

There are three ways that Edna could pay for her long-term care: pay out of pocket, use long term care insurance, or apply for Medicaid. Because Edna does not have enough assets to pay for her care and she does not have any long-term care insurance in place, her only option is to apply for Medicaid.

What is the 5-year Medicaid lookback period?

The 5-year lookback period is a rule enacted by Medicaid that examines any transfer of assets within 5 years of the application for Medicaid.  A penalty can be applied for any uncompensated transfers (gifts) made within this time period. Even though Edna’s annual gifts to her children were legal from a tax perspective, Medicaid doesn’t use the same rules as the IRS. Medicaid operates under the assumption that the gifts to the children were given for the purpose of trying to qualify for Medicaid and imposes an ineligibility period when it finds that assets were given away during the lookback period.

This means that Edna will not be eligible for Medicaid to pay for her long-term care needs immediately. The penalty period is calculated by dividing the total amount gifted during the look back period by the average monthly cost of care in a nursing home. The number for 2021 in Colorado is $8,776. Because Edna gave away $210,000 over the last 5 years, she will be ineligible to receive Medicaid for her long-term care for almost 2 years (210,000/8776 = 23.93 months).

In the meantime, without any other plan in place, Edna and her kids will need to come up with a way to pay for her care at approximately $105,096 per year for the next two years.

This could have easily been avoided if Edna had chosen a better plan for her long-term care needs.

Even with the reality that nearly 70% of people over the age of 65 will need some level of extended care and will need to find a way to pay it, very few of us actually have a plan in place.

Be prepared and confident. Plan for a way to pay for the extended care long before you need it. Make it a part of a comprehensive and effective estate plan. And remember to communicate your plan with your loved ones as they will be the ones trying to decide what do for you.

We have helped thousands of families consider long-term care along with their estate planning. Call us today to discuss how to plan for your long-term care needs.

Read more about Medicaid and the Medicaid 5 Year Lookback Period.

Five Things you Need to Know About Colorado’s Medicaid Recovery Program

Frequently Asked Questions About Medicaid Planning

Medicaid Qualification

Understanding the Medicaid Look-Back Period and Penalty Period

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