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Medicaid’s Five-Year Look-Back and the Importance of Advanced Planning

Ronald Fatoullah, Esq., Elizabeth Forspan, Esq., Eva Schwechter, JD
Published Date:
Apr 1, 2017

Recent studies show that health care costs for the aging population are increasing at staggering rates. According to New York State’s Office of Health Insurance Program, one year in a nursing home can cost an individual upwards of $145,000. In some regions, there are facilities where private pay rates are in excess of $200,000 per year. Based on these figures, it is imperative for individuals to plan ahead for their long-term care.

In establishing a long-term care plan, one option is for the individual to purchase long-term care insurance. The premiums can be costly, but the policy can prove to be very beneficial, especially when purchased at a relatively young age by someone who is in good health and who will be able to obtain a policy for a lower annual premium. Not everyone, however, can afford or qualify for long-term care insurance. Moreover, the carriers typically reserve the right to increase premiums (sometimes drastically), which can cause a lot of unease for the policyholder.

Another option is to engage in asset preservation planning, or Medicaid planning. Currently, Medicaid is the only governmental insurance program that covers the cost of long-term care. Medicaid is a “means-tested” program enacted by Congress in order to address the health care needs of individuals who cannot afford to privately pay for long-term care. Medicaid is a jointly funded, federal-state health insurance program for low-income and needy individuals. (The funding of Medicaid might very well see dramatic changes in the new Trump Administration).

In order to qualify for long-term Medicaid coverage, an individual must be over 65 years of age or disabled, blind, eligible for public assistance, or a recipient of Supplemental Security Income. Because it is a means-tested program, Medicaid requires that in order to be eligible for benefits, an individual can only be in possession of minimal assets. In 2017, an individual applicant cannot have more than $14,850 in non-exempt assets to be eligible for Medicaid benefits in New York. Exempt assets, or assets which are not countable for Medicaid purposes, include qualified retirement accounts that are in payout status based on the life expectancy of the applicant and the individual’s home (in the event that the Medicaid applicant, a spouse, a minor, or a disabled or blind child is living in the home). There are other exempt assets and circumstances that are beyond the scope of this article. 

When an individual applies for nursing home Medicaid coverage, one of the key issues to consider when preparing the Medicaid application is whether any gifts or transfers by the applicant were made during the last five years. Medicaid requires applicants to disclose all financial transactions that occurred during the five years prior to the submission of the nursing home Medicaid application. This five-year period is known as the “look-back” period. In New York State, the five-year look-back is only imposed with respect to “Institutional Medicaid”—or nursing home—applications. There is currently no look-back for a “Community Medicaid” application (home care). The focus of this article is the five-year lookback requirement for Institutional Medicaid.

In the context of Medicaid, a penalty is imposed on any applicant who has made certain transfers (or gifts) within the five-year look-back period. Any transfer during that time period might be questioned by the local Department of Social Services (“DSS”). The relevant DSS views any asset transferred (gifted) during the five-year period as if the applicant owned such asset on the date of the Medicaid application. Living expenses such as rent, clothing, or items that benefitted the applicant should not be treated as a gift. Medicaid will treat contributions to a charity and transfers to a child, grandchild, or any other uncompensated transfer as gifts for the purposes of qualifying for Medicaid benefits.

If the Medicaid agency determines that a Medicaid applicant has made a gift, it will impose a penalty period based on the amount of the total gift. The penalty period is a period of time during which the person who transferred his or her assets will be ineligible for Medicaid services and will be required to pay privately. The penalty is based on the average monthly cost of a nursing home in the county where the applicant resides, as determined by Medicaid. Medicaid updates these rates, which are referred to as regional rates, on an annual basis. For example, in 2017, according to Medicaid, the average monthly cost of a nursing home in any of the five boroughs of New York is $12,157. As such, if a NYC applicant made a gift of $121,570, he or she would be ineligible for Medicaid for 10 months ($121,570 divided by $12,157). 

In discussing gifting, many people confuse Medicaid’s rules and the rules concerning the federal gift tax, erroneously believing that, in the context of Medicaid, they are permitted to make gifts as long as such gifts do not exceed the annual federal gift tax exclusion amount. Currently, under federal tax law, an individual can gift up to $14,000 to an unlimited amount of individual recipients in a given taxable year. Such gifts are not taxable and do not require the filing of a gift tax return (Form 709). It is important to note that this is a provision that is relevant for purposes of federal estate and gift taxes and has nothing to do with Medicaid planning. For example, according to federal tax law, an individual who gifts $14,000 to each of his five grandchildren will not have to file any gift tax return. For Medicaid purposes, however, that same individual will be treated as having made gifts in the amount of $70,000 for Medicaid purposes and will be penalized accordingly.

As a result of the five-year look-back, individuals must undertake advanced planning so that assets can be transferred with sufficient time. There are various planning techniques that can be employed. With regards to an applicant’s personal residence, transfers can create penalties within the five-year look-back. Potential transfer penalties must be assessed alongside the various tax ramifications to determine the best plan in an individual’s case. The outright transfer of a homestead is considered a gift of the entire fair market value of the property. The transfer of a homestead with a life estate retained by the grantor, which preserves the grantor’s right to live in the home for the rest of his life, also creates a gift, the value of which is based on the individual’s life expectancy and the IRS tables, which would determine the period of ineligibility for institutional Medicaid.

If the grantor retains a life estate and the home is not sold during the grantor’s lifetime, the home will be includable in the grantor’s taxable estate, and his or her heirs will consequently receive the home with a “stepped up” basis under current tax law. A “stepped up” basis means that the tax basis of the home will be increased to the fair market value on the date of the grantor’s death (or alternate valuation date) instead of using its value on the date of purchase. This results in minimizing any capital gains taxes that might be due upon the beneficiary’s sale of the home. Life estates, however, are subject to Medicaid recovery, meaning that after the death of a Medicaid recipient, Medicaid can seek to recover for the cost of care expensed on the recipient from the value of the life estate once the property is sold.

Please note that if the grantor retains a life estate and the grantee sells the home while the recipient is alive, the applicant is entitled to the present value of the life estate pursuant to Medicaid’s charts, which would create ineligibility for Medicaid benefits upon the sale of the house. The income tax implications of such a sale should also be carefully reviewed in light of, among other things, the IRC section 121 exclusion relating to the sale of a principal residence (see IRC section 121(d)(8) and Treasury Regulations section 1.121-(4)(c)). It is imperative to determine the various Medicaid and tax consequences in concert in order to determine the best possible plan for each individual.

While the five-year look-back cannot be avoided entirely, advanced planning techniques can mitigate some issues with regard to transferring assets. One such technique is the transfer of assets to an irrevocable Medicaid asset preservation trust. A properly drafted trust for Medicaid purposes is irrevocable and will generally not have the grantor or settlor serve as trustee. The advantage of a properly drafted trust is that once the asset has been held in trust for five years, Medicaid will view that asset as being unavailable, as long as the trust has been administered properly. At the same time, when properly drafted, the trust assets may remain eligible for the various tax benefits that would no longer apply in a case where the assets are gifted outright. These tax advantages include the basis step-up and senior citizen-related exemptions. If the home is sold after the look-back period has expired, Medicaid benefits will not be discontinued, and no penalty period will be imposed on the Medicaid recipient because the proceeds will be held by the trust, and Medicaid will not attribute them to the individual.

Medicaid continues to be the only way for many seniors in the United States to pay for the high cost of their long-term health care needs. Advanced planning—specifically, the timely transfer of assets to an irrevocable Medicaid asset preservation trust—can help prepare for the five-year look-back for Institutional Medicaid and allow an individual to preserve his or her assets while meeting his or her healthcare needs. Using a multi-faceted approach to elder care planning, including tax and estate planning, and giving careful thought and attention to the competing concerns will enable an individual to qualify for Medicaid while best preserving and protecting his or her assets for the future.

FatoullahRonald A. Fatoullah, Esq., is the principal of Ronald Fatoullah & Associates, a law firm that concentrates in elder law, estate planning, Medicaid planning, guardianships, estate administration, trusts, and wills.


 Elizabeth Forspan, Esq.,
is the managing attorney of the firm.


Eva Schwechter, JD,
is an associate with the firm. The authors can be reached at 212-751-7600 or 516-466-4422. Mr. Fatoullah is also a partner with Advice Period, a wealth management firm.

Views expressed in articles published in Tax Stringer are the authors' only and are not to be attributed to the publication, its editors, the NYSSCPA or FAE, or their directors, officers, or employees, unless expressly so stated. Articles contain information believed by the authors to be accurate, but the publisher, editors and authors are not engaged in redering legal, accounting or other professional services. If specific professional advice or assistance is required, the services of a competent professional should be sought.