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What you need to know about the Medicaid look-back period and long-term care

Estate planning needs to take into account if one or both spouses will need to tap into Medicaid for long-term care needs.

Unlike Medicare which is an insurance program, Medicaid is a social welfare program with certain eligibility requirements. These programs are not only called Medicaid, for example, California has Medi-Cal and Wisconsin has Badgercare - no matter what the program is called it is important that you learn what your state's program pays for as well as its eligibility requirement. It's a good idea to tell your children what you find out. Also, there are federal eligibility mandates as well. For the most part, Medicare has limited benefits for long-term health care, Medicaid does cover it though subject to certain restrictions.

Often, seniors will divest themselves of assets when they learn they need long-term care. Many seniors do not understand that unless these assets were divested 5 years before filing for Medicaid there will be problems with their state's Medicaid program.

The Federal Law Governing Asset Transfers and Medicaid

The United States Congress made for a period of Medicaid ineligibility known as the "penalty period" that applied to people who transferred assets before applying for Medicaid. To enforce the law, state Medicaid programs look back at all asset transfers that occurred in the previous five-year period. This is called the five-year look-back period.

Suppose a person transferred $50,000 a year before applying for Medicaid. They will be penalized in an amount that equals the non-qualifying transfer. Imagine your state's monthly cost for a long-term care facility is $5,000 - you will be penalized for ten months before your Medicaid becomes effective. Higher amounts of assets transferred means a longer penalty period. There is no limit on how long a Medicaid penalty period lasts. So, folks who transfer a high-net-worth to others or a trust may be penalized for the rest of their life.

Strategies for Dealing With Medicaid Penalties

The most effective way to deal with meeting a long-term care need is buying a long-term care insurance. But, unless you start a policy when you are young, the premiums can be too onerous.

Following are five strategies that elder law attorneys prefer when their older clients need long-term care.

1. An Asset Protection Trust - this is the vehicle most often used in estate planning for asset protection. However, contributions to the trust are subject to the Medicare Five-Year Look Back rules.

2. A Pooled Income Trust - this strategy deals with the Medicaid limits on monthly income for Medicaid beneficiaries. Income limits vary by state. This strategy is mostly for disabled people with "excess income."

3. A self-funded annuity or a promissory note. The thinking behind this strategy is to create a cash flow to handle payments during a shortened penalty period.

4. Before going to a long-term care facility a relative might participate in a Caregiver Agreement that if correctly drawn up does not consider any wages paid to the relative as a distribution of assets subject to the Medicaid look-back period even if paid in advance.

5. Spousal transfers are allowed under Medicaid regulations and are not subject to the look-back period.

All of these strategies are complicated and should be prepared by a qualified elder law attorney.

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