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Medicaid's Five-Year Look-Back Period and Penalties for Gifting

Many of my elder law clients in northern Michigan have questions about the Medicaid look-back period and penalties for gifting.  The first thing to know is that Medicaid planning to protect assets can be done at any time, even during the look-back period, or after a client is in a nursing home.  With that initial piece of information in hand, we can proceed to an explanation of the Medicaid system for penalizing gifts.

The Michigan Department of Health and Human Services processes applications for Medicaid benefits.  DHHS policy directs an eligibility specialist to investigate all gifts, or transfers for less than fair market value, that an applicant or his spouse made within five years of the applicant being in a nursing home and otherwise being eligible for Medicaid.  Let's unpack that a little bit. 

First, there are two thresholds to cross before a gift penalty begins to run.  The applicant must be in long-term care and eligible for Medicaid based on his current assets.  What that means is that the look-back period doesn't even begin until an applicant is receiving care and is below Medicaid's asset limits.

Second, DHHS can consider all outright gifts made in the look-back period, and any transfers for less than fair market value.  For example, let's say you sell a $10,000 car to a grandchild in need, but you give them a deal and sell it for $8,000.  That is a $2,000 gift for Medicaid purposes.  DHHS can add up every gift, no matter how small, when using its penalty formula.  Applicants have been penalized for small tithes to churches, for small Christmas gifts, for buying food for a destitute child, etc.  It all depends on how aggressive the DHHS eligibility specialist processing the application is.

Third, the gifts are called divestments for the Medicaid program.  DHHS has a formula for punishing gifts made in the five-year look-back period.  DHHS adds every gift made in the look-back period to get a total divestment amount.  By adding all the gifts together, even $20 gifts can add to your penalty.  Once the total divestment amount is calculated, DHHS divides that number by the average cost of a nursing home in Michigan; $8,261 for 2018.  This results in a number of years, months or days that Medicaid will not pay for long-term care expenses.  For an easy example, let's say you had a total divestment amount of $82,610, the formula would result in the applicant being ineligible for Medicaid long-term care coverage for ten months.

A divestment can only be corrected by returning 100% of the gift, or by paying fair market value.  Once a penalty period begins to run, the penalty days are lost, even if the gift is later returned.

This is a complicated area of law, with the potential for devasting consequences.  If you have any questions about Medicaid divestments and penalties, please feel free to schedule a free consultation by calling (231) 947-6800.

John J. Rizzo III
Swogger, Bruce & Millar Law Firm, P.C.
10691 East Carter Road, Suite 103
Traverse City, MI 49684
(231) 947-6800
www.swoggerandbruce.com

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