Medicaid planning can involve certain risks and drawbacks. In particular, you need to be aware of “look-back” periods and possible disqualification for Medicaid, and adverse tax consequences. Because the Medicaid transfer rules have been tightened in recent years (and may continue to contract in the years ahead), you should consult with an attorney experienced with Medicaid planning.
Look-back period
When you apply for Medicaid, the state has the right to review or look back at your finances (and those of your spouse) for a period of months before the date you applied for assistance. For transfers made on or after February 8, 2006 (the date of enactment of the Deficit Reduction Act of 2005), the look-back period is 60 months.
Certain transfers of countable assets for less than fair market value, made during the look-back period, will result in a waiting period or period of ineligibility before you can start to collect Medicaid benefits. The formula for determining the waiting period may be explained as the fair market value of the transferred assets divided by what Medicaid determines to be the average monthly cost of nursing homes in your locale, the quotient representing the number of months for which you will be ineligible for certain Medicaid benefits.
Example(s): Assume that Ralph used $288,000 to create an irrevocable trust, naming himself as beneficiary and his friend as trustee. Ralph entered a nursing home two years later at the rate of $6,000 per month (which is the average in his locale) and applied for Medicaid. But because Ralph transferred assets to an irrevocable trust during the look-back period (60 months), he will be ineligible to receive Medicaid benefits for 48 months ($288,000 divided by $6,000 equals 48 months).
It is possible, therefore, that engaging in Medicaid planning can actually cause you to become ineligible for Medicaid for a time.
Adverse tax consequences
If you give away your assets during your lifetime, the recipients (beneficiaries) will step into your shoes in a tax sense–they’ll get the same tax basis in the assets that you had possessed. That can be a drawback, since your holding onto the assets until death would provide the recipients with a stepped-up basis; that is, the fair market value of the assets on your date of death would become the tax basis for your beneficiaries. Nevertheless, certain Medicaid planning tools can preserve the stepped-up basis, even when you effect lifetime transfers. It is important, therefore, to evaluate your Medicaid planning strategies from all perspectives, including a tax viewpoint. What may be the most wise decision from a Medicaid standpoint might be a poor move from a tax standpoint. (Tools that won’t prevent the ultimate recipients of your assets from getting a stepped-up tax basis upon your death include transfer subject to life estate, transfer subject to special power of appointment, and transfer in trust.) For more information, consult a financial professional or an elder law attorney experienced with Medicaid planning.