At some point during your retirement years there is a very good chance you (and/or your spouse) will need long-term care. There is also a good chance that you will need to qualify for Medi-Cal benefits in order to cover the high cost of that care. Qualifying for Medi-Cal can be a complicated process given the complex eligibility guidelines. The asset transfer rules, in particular, are a source of much confusion for applicants. While it is always best to consult with an experienced Medi-Cal planning attorney if you foresee the need to qualify for Medi-Cal, you may also benefit from knowing the answers to some basic questions regarding Medi-Cal eligibility, asset transfers, and gifting while participating in the Medi-Cal program.
Can an applicant transfer assets to an adult child in anticipation of the need to qualify for Medi-Cal?
No, not without incurring a penalty. Medi-Cal uses a five-year “look-back” period when determining an applicant’s eligibility. The “look-back” provision allows Medi-Cal to review an applicant’s finances for the five-year period prior to applying for benefits. Asset transfers made during that time period for less than fair market value will be flagged and the value of the asset effectively imputed back into the applicant’s estate. This, in turn, will cause the applicant to incur a penalty period before being eligible for benefits.
Are gifts of up to $14,000 per year excluded from the Medi-Cal transfer rules?
No. This is a common source of confusion. The $14,000 per year figure refers to the I.R.S. annual exclusion rule that allows a taxpayer to make gifts valued at up to $14,000 per year to an unlimited number of beneficiaries without incurring gift taxes. The Medi-Cal asset transfer rules are completely unrelated.
How are asset transfer penalties calculated?
As a Medi-Cal applicant or recipient, the figure you need to be concerned with is the “penalty divisor” for your state. The penalty divisor is the average cost of a month of nursing home care in the state and is used when calculating your penalty period if your assets exceed the program limit. Penalties are calculated by dividing the value of the amount transferred by the penalty divisor. For example, if you gifted your vacation house valued at $100,000 to your daughter you would incur a penalty of about 20 months if the divisor were $5,000 ($100,000/$5,000). Keep in mind that the penalty divisor is subject to change as the cost of nursing home care changes.
Can my mother just give me all of her assets to hold and tell Medi-Cal she has no assets?
Absolutely not. Whether your mother calls it a “gift” or not, Medi-Cal will consider it an asset transfer and failure to report asset transfers constitutes Medi-Cal fraud. Moreover, the gift would incur a penalty period during which your mother would not be entitled to benefits. If she accepted benefits anyway during that time period she could be required to repay them. The bottom line is that there is no easy way around the Medi-Cal asset transfer rules nor the five-year “look-back” period.
Since my mother’s house is considered an exempt asset by Medi-Cal, can she give me the house without incurring a penalty?
Maybe. The fact that the asset is an exempt asset for Medi-Cal eligibility purposes is not sufficient to avoid a penalty. In most states, all asset transfers while receiving Medi-Cal are potentially subject to a penalty. There are, however, certain transfers that may not incur the penalty. Your mother may be able to transfer her house, without incurring a penalty, to the following people:
- Her spouse
- Her child who is blind or permanently disabled
- A trust for the sole benefit of anyone under age 65 and permanently disabled
- Her child who is under age 21
- Her child who has lived in her home for at least two years prior to your mother moving to a nursing home and who provided your mother with care that allowed her to stay at home during that time.
- A sibling who already has an equity interest in the house and who lived there for at least a year before your mother moved to a nursing home.
The best way to avoid penalties is to include Medi-Cal planning in your estate plan well before you enter the five-year “look-back” period. Since that is not always possible, the next best thing is to make sure you consult an experienced Medi-Cal planning attorney before you apply for Medi-Cal and certainly before you make any asset transfers. Your attorney can help you develop a gifting strategy that will minimize any potential penalties you might incur.