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If your parents are “active seniors” spending their golden years taking helmet-less bike rides together like the smiling silver foxes in the above stock image, you’re probably not concerned with how they’ll pay for a nursing home—that’s years away. But making a plan early can protect their money, and that money could eventually be your money if your parents like you enough.

A single private room in a nursing home in the U.S. costs an average of $297 per day, or $9,034 per month. That eye-popping figure is out of reach for most, but it can be offset by Medicaid, which will generally pay 100% of nursing home costs for eligible people. But there’s a catch. The government generally expects people to give almost their entire income back to Medicaid, as well as spend their saved assets before the benefits kick in. In other words, in order to take full advantage of the program, you generally can’t have very much money. So if your parents built up a lifetime of capital, it could all go to a nursing home soon after Mom breaks her hip in a bike crash or dad comes down with dementia.

The dreaded five-year look-back

To discourage people from giving away their wealth right before they start collecting Medicaid benefits for longterm care, the program has a “look-back” period of five years (in most states). Beginning from the date of application, the relevant government agency will review the last half-decade of an applicant and their spouse’s financial transactions for substantial gifts and assets sold for under market value. If they find any, the program may penalize applicants by denying Medicaid benefits for a period of time, generally equivalent to the length of time they would have been able to pay for longterm care had the gift not been given, or had the assets been sold for fair market value.

There are so many state-by-state and case-by-case details that it makes sense to talk to a professional if there’s enough money involved to make it worthwhile, but in general: Debt payments, home repair and modification costs, funeral trusts, personal care agreements, and some kinds of annuities are generally not penalized during the look-back period. Charitable donations, gifts to family members over a state-determined value, and transfer of property or goods at below market rates will probably be reviewed in terms of eligibility—you can’t get away with buying mom’s car for $5.

It’s worth noting that Medicaid’s definitions of “gift” and the IRS’s generally differ. So a gift might be small enough to be federally tax-free, but not small enough for Medicaid.

The value of starting early

The most obvious way to avoid look-back penalties entirely is by planning at least five years ahead—if your folks give you a million bucks five years and one day before they apply for benefits, Medicaid will never know. Individual situations vary, as do the laws in different states, but establishing a revokable or irrevocable trust is a common strategy for asset protection for the aging, but will generally only “work” if it’s done before the five-year look-back period begins. In other words: Consult with a financial professional who specializes in Medicaid planning as soon as your parents will agree to it.

Paying down assets

If your parents didn’t establish a trust in time nor give you all their money years ago, there are still options for paying down assets that won’t set off red flags for Medicaid. It varies from state to state, but generally, the following kinds of gifts can be given to the following kinds of people during the look-back period, and even after entering a longterm care.

  • Spouse: Medicaid considers all of a married couple’s wealth as joint assets when determining eligibility, but a non-applicant spouse is allocated a larger portion of the total. The amount varies by state, but the federal maximum for the Community Spouse Resource Allowance is $148,620.
  • Children: Trusts can be established for children who are under 21 years old, disabled, or legally blind.
  • Siblings: A Medicaid recipient’s home can be transferred to a sibling if they are part-owner and have lived in the home for a minimum of one year prior to the applicant’s nursing home stay.
  • Caregiving child: A home can be transferred to an adult child who was a caregiver, as long as they spent at least the two years immediately preceding the parent’s relocation to an assisted living residence.

What to do if your parents have violated the look-back rule

It’s possible (maybe even common) for people to violate the look-back rule without the intention of gaming the Medicaid system, and there are strategies that might help gain them Medicaid eligibility. These include:

  • Asset recuperation: If a Medicaid applicant can get their gifted assets back, Medicaid may reconsider any penalties. Some states require full recuperation, some partial.
  • Undue hardship: If an applicant tries to recover gifted assets and fails (maybe that televangelist won’t return your parents’ generous donations), and is unable to provide food, clothing, or shelter for themselves, they may be granted Medicaid benefits. But it’s not going to be easy. Anyone trying to dispute a Medicaid penalty should consult with a financial professional. This is not a do-your-own-research situation.

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