“Is the look back period the same as the penalty period under Alabama Medicaid?”
No — the look back period under Alabama Medicaid is 5 years and the penalty period (if gifts were made during the 5 years) can be more or less than 5 years. This is an area that confuses many so let’s understand this together and work through some examples.
Under Alabama Medicaid (and every other state I know of), if you qualify for Medicaid and apply for Medicaid, then Medicaid “looks back” in time 5 years (60 months).
Why is it called a “lookback period?”
Because Medicaid is looking back in time into the past, in the immediate 5 years before you applied (and are qualified) for Medicaid.
What is Medicaid looking for?
Any gifts you or your spouse made.
What’s a gift?
Anything where you give less than full fair market value.
- You transfer $14,000 to your son and he gives you nothing in return — this is a $14,000 gift
- You sell your $20,000 car to your daughter for $8,000 — this is a $12,000 gift
- You donate $75,000 worth of money to a charity — this is a $75,000 gift.
What happens if I made a gift (or gifts) in the previous 5 years before I apply for Medicaid?
Medicaid totals up all of the gifts to come up with your total gifted amount. So let’s say you had the following gifts:
- 6 years ago you gave away $300,000
- 4.5 years ago you gave away $70,000
- 3 years ago you gave your grandchild $20,000 for college
- Last year you gave your lake house to your children and it was worth $400,000
Remember Medicaid only looks back in time 5 years.
So the $300,000 gift 6 years ago does not count.
But the $70,000 and the $20,000 and the $400,000 do count for a total of $490,000.
OK so what does Medicaid do with the total amount I gifted in the last five years?
Medicaid divides the total gifted amount by $5500.
So in our example that means $490,000 divided by $5,500 equals about 89.
What does the number 89 in this example mean?
This is the number of months that you have to privately pay for the nursing home — this is after you have already reduced your money to the low level that will qualify you for Medicaid. (If you are not qualified for Medicaid, then this doesn’t apply).
So what is this number called when Medicaid divides my total gifts by $5,500?
This is the penalty period. You are penalized for giving away assets during the 5 years before you apply for (and are qualified) for Medicaid.
I thought the penalty period could not exceed the 5 year look back period?
This is a common mis-understanding. The penalty period goes into the future and can be anytime from zero to an unlimited number. Let’s look at some examples:
- In the last five years you gave away nothing. The penalty period going into the future is zero.
- In the last five years you gave away $1,100,000. The penalty period going into the future is 200 months which is over 16 years!!
- Let’s say you gave away $110,000 — then the penalty period going forward in time is 20.
So the look back and penalty periods don’t have anything to do with each other?
They are related in this sense — we look back in time to get the amount of the gifts and then the penalty goes forward in the future.
But they are not related in terms of the penalty is automatically 5 years or is limited to 5 years. It is instead simply a math question.
So does this mean I should never give away assets if I might ever, in the next five years, need a nursing home?
No — properly “gifting” to a person (not normally our preference) or to the right type of trust (hint: your normal estate planning revocable living trust won’t do it) can be a powerful tool in building your long term care strategy.
The key is it has to be done in the proper way.
At the proper time.
With a plan in place so that if you do need long term care, you can handle the penalty period or perhaps in your case you don’t even apply for Medicaid even if you could qualify.
How in the world do I pay through the penalty or get through the five year look back so I won’t have a penalty?
Every situation is different. We will sit down with you to help you figure out the best way and time to apply for Medicaid if we represent you.
Here are some of the ways:
- Have the right type of long term care insurance;
- Use the Va Pension (Aid & Attendance) which can pay up to $25,000 a year tax free to you;
- Have a proper “Medicaid Compliant” annuity that can help you pay for your nursing home while you are in a penalty period;
- Have family that is able to pay for the nursing home until Medicaid can pay it — often this is out of a proper Medicaid Compliant Ir-revocable Trust.
There are many ways to handle this situation — if you are in a crisis situation now where a loved one is in the nursing home, you can generally still make this work out without losing everything. If you are healthy now, then it is the perfect time to do Medicaid planning.
Is Medicaid the complete answer to long term care?
No. Medicaid is one tool to help you. It is not a “cure all” and it is not appropriate for everyone. But for 95% of Alabamians it is a vital part of the solution to the devastating costs of long term care where a stay for years in a nursing home can completely drain a family’s assets that took decades to build up.
So what should I do if I have questions?
If you (or your parents) live in Alabama, feel free to give us a call at 205-879-2447. We have an office in Birmingham and also in the Huntsville area where we can meet you. If you live elsewhere we can make that work also as we represent families from all over the state.
You can also fill out our online contact form and that will get a message to us and we’ll respond to you right away. Either way we look forward to helping you plan for your long term care.