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The Myth of the $10,000 Transfer

One of the major rules of Medicaid eligibility is the penalty for transferring assets. Congress does not want you to move into a nursing home on Monday, give all your money to your children (or whomever) on Tuesday, and qualify for Medicaid on Wednesday. So it has imposed a penalty on people who transfer assets without receiving fair value in return. These restrictions, already severe, have been made even harsher by enactment of the DRA.  Many people have heard that they can transfer $10,000 per year to a person without any penalty, but this is simply not true.  They confuse an old gift tax rule which excludes transfers of what used to be $10,000, but which are now $12,000, per year without incurring a gift tax. While there is no gift tax consequense to an annual $12,000 transfer, there is most certainly a medicaid penalty for such a transfer made within 60 months of application for Medicaid. 

This penalty is a period of time during which the person transferring
the assets will be ineligible for Medicaid. The penalty period is
determined by dividing the amount transferred by what Medicaid
determines to be the average private pay cost of a nursing home in your
state.  In Mississippi, that divisor is $4,600.   

Example: For example, if you live in a state where the average monthly cost of care has been determined to be $5,000, and you give away property worth $100,000, you will be ineligible for benefits for 20 months ($100,000 ÷ $5,000 = 20).

Another way to look at the above example is that for every $5,000
transferred, an applicant would be ineligible for Medicaid nursing home
benefits for one month.

In theory, there is no limit on the number of months a person can be ineligible.

Example: The period of ineligibility for the transfer of property worth $400,000 would be 80 months ($400,000 ÷ $5,000 = 80).

However, for transfers made prior to enactment of the DRA on February
8, 2006, state Medicaid officials will look only at transfers made
within the 36 months prior to the Medicaid application (or 60 months if
the transfer was made to or from certain kinds of trusts). But for
transfers made after passage of the DRA the so-called “lookback” period
for all transfers is 60 months.

Example: To use the above example of the $400,000 transfer, if the
individual made the transfer on January 1, 2003, and waited until
February 1, 2006, to apply for Medicaid — 37 months later — the
transfer would not affect his or her Medicaid eligibility. However, if
the individual applied for benefits in December 2005, only 35 months
after transferring the property, he or she would have to wait the full
80 months before becoming eligible for benefits. On the other hand, if
the individual made the transfer on February 10, 2006, he or she would
have to wait 60 months before applying for Medicaid in order to avoid
an ineligibility period

The second and more significant major change in the treatment of
transfers made by the DRA has to do with when the penalty period
created by the transfer begins. Under the prior law, the 20-month
penalty period created by a transfer of $100,000 in the example
described above would begin either on the first day of the month during
which the transfer occurred, or on the first day of the following
month, depending on the state. Under the DRA, the 20-month period will
not begin until (1) the transferor has moved to a nursing home, (2) he
has spent down to the asset limit for Medicaid eligibility, (3) has
applied for Medicaid coverage, and (4) has been approved for coverage
but for the transfer.

For instance, if an individual transfers $100,000 on April 1, 2007,
moves to a nursing home on April 1, 2008, and spends down to Medicaid
eligibility on April 1, 2009, that is when the 20-month penalty period
will begin, and it will not end until December 1, 2010. How this change
will be implemented from state-to-state will be worked out over the
next few years.

Exceptions to the Transfer Penalty

Transferring assets to certain recipients will not trigger a period of Medicaid ineligibility. These exempt recipients include:

(1) A spouse (or a transfer to anyone else as long as it is for the spouse’s benefit);

(2) A blind or disabled child;

(3) A trust for the benefit of a blind or disabled child;

(4) A trust for the sole benefit of a disabled individual under age 65
(even if the trust is for the benefit of the Medicaid applicant, under
certain circumstances).

In addition, special exceptions apply to the transfer of a home. The
Medicaid applicant may freely transfer his or her home to the following
individuals without incurring a transfer penalty:

(1) The applicant’s spouse;

(2) A child who is under age 21 or who is blind or disabled;

(3) Into a trust for the sole benefit of a disabled individual under
age 65 (even if the trust is for the benefit of the Medicaid applicant,
under certain circumstances);

(4) A sibling who has lived in the home during the year preceding the
applicant’s institutionalization and who already holds an equity
interest in the home; or

(5) A "caretaker child," who is defined as a child of the applicant who
lived in the house for at least two years prior to the applicant’s
institutionalization and who during that period provided care that
allowed the applicant to avoid a nursing home stay.

Congress has created a very important escape hatch from the transfer
penalty: the penalty will be "cured" if the transferred asset is
returned in its entirety, or it will be reduced if the transferred
asset is partially returned.


Is Transferring Assets Against the Law?

You may have heard that transferring assets, or helping someone to
transfer assets, to achieve Medicaid eligibility is a crime. Is this
true? The short answer is that for a brief period it was, and it’s
possible, although unlikely under current law, that it will be in the

As part of a 1996 Kennedy-Kassebaum health care bill, Congress made it
a crime to transfer assets for purposes of achieving Medicaid
eligibility. Congress repealed the law as part of the 1997 Balanced
Budget bill, but replaced it with a statute that made it a crime to
advise or counsel someone for a fee regarding transferring assets for
purposes of obtaining Medicaid. This meant that although transferring
assets was again legal, explaining the law to clients could have been a
criminal act.

In 1998, Attorney General Janet Reno determined that the law was
unconstitutional because it violated the First Amendment protection of
free speech, and she told Congress that the Justice Department would
not enforce the law. Around the same time, a U.S. District Court judge
in New York said that the law could not be enforced for the same
reason. Accordingly, the law remains on the books, but it will not be
enforced. Since it is possible that these rulings may change, you
should contact your elder law attorney before filing a Medicaid
application. This will enable the attorney to advise you about the
current status of the law and to avoid criminal liability for the
attorney or anyone else involved in your case.

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