Families often are confused by the Medicaid rules. Much of the confusion revolves around rules relating to the gifting of assets and the “look-back” period. This confusion leads to many misguided beliefs about how one can reduce assets to qualify for Medicaid nursing home care.

In fact, one of the most mistaken beliefs is that a person can simply gift or transfer assets to another person’s name in order to qualify for Medicaid benefits. As I explain further, the gifting of assets can disqualify an individual from receiving benefits to pay for nursing home care for a significant period of time.

In February 2006, Congress passed The Deficit Reduction Act (the “DRA”). The DRA increased restrictions on Medicaid applicants and their families. Some of the most sweeping changes were those that dealt with the gifting of assets.

Under the DRA, an applicant is now required to disclose transfers of assets made within five (5) years from the date of the Medicaid application. This is known as the “look-back” period. Thus, for example, a woman who gives her grandchild monies for college in tuition in 2008 may now be required to disclose that gift if she applies for Medicaid nursing home benefits any time within five (5) years of that gift—2013.

If one does make a gift within the look-back period, a penalty period may be calculated based on the total dollar amount of gifts and a penalty divisor of $5,000. To help your understanding, the $5,000 divisor theoretically represents the monthly average cost of nursing home care.

Let’s say that a mother gives $25,000 to her son and then applies for Medicaid nursing home benefits within 5 years from the date of that gift. The government would divide $5,000 in to the $25,000 gift and may impose a 5 month penalty before benefits will be rewarded. To show the reasoning of the penalty, “but for” the gift of $25,000, the Medicaid applicant would have had the resources to pay for 5 months of nursing home care.

Of course, confusion is only enhanced by other gifting rules that may have nothing to do with Medicaid, such as the 2010 Gift Tax Annual Exclusion of $13,000. Consequently, it is imperative that people concerned about these rules talk with someone capable of guiding them before making major decisions that could affect eligibility. Be aware that an Elder Law attorney can advise a potential applicant on how best to legally preserve assets.