This week, I want to talk about a crucial topic — Medicare, Medicaid, and how they fit into estate planning and important differences between the two. It can be confusing, and they are both quite different. Whether you are navigating your own healthcare needs or helping a loved one, today’s episode is packed with important information that can make a real difference in managing long-term care and protecting assets.
If you are an older adult concerned about protecting your assets or the adult child of an aging parent, understanding the Medicaid five-year look-back period is key to planning for the future. It comes up a lot when I am in strategy sessions.
In this episode, we will dive into this rule, share several examples, and give you recommendations on how to best prepare. We will also discuss some strategies that can help you avoid the consequences of the five-year look-back, including using Medicaid Asset Protection Trusts and Miller Trusts. Plus, we will talk about an alternative strategy for individuals who prefer to retain control over their assets: with a Revocable Living Trust.
Let’s start by revisiting the basics of Medicaid. If your aging parent needs long-term care—like help with daily activities or a stay in a nursing home, Medicaid may be available to help with the costs of that care. I emphasize maybe. Because before they can qualify for Medicaid, they must meet certain eligibility requirements, which include having limited income and assets. It goes up a little bit every year – here we are into 2025. The current income limit here in Tennessee is just under $3,000.00 or $2,901.00. Step one for qualifying for Medicaid is having monthly income lower than this amount. That’s not all…
This is where the five-year look-back period comes in. Medicaid has a rule that says it will look at any asset transfers made in the last five years. What do I mean? Well, the standard example is quitclaiming the family house away to your kids. That is a big problem. Let’s say your parents gave away any significant assets, sold property for less than its value, or transferred assets to someone else during that time, Medicaid can and often will penalize them for that transfer. The penalty usually means a delay in eligibility for Medicaid benefits.
Let’s break this down with some real-world examples of what the five-year look-back period might look like.
Example #1: The House Transfer
Let’s say your father, Jim, is 80 years old and has been living in the family home for decades. Jim is in good health but has recently been diagnosed with early-stage dementia. You are one of his adult children, who has agreed to act as his caregivers. The duties will include helping Dad manage his finances, and so you decide to resolve the biggest elephant in the room. Let’s get rid of the house – you decide that your dad should transfer the house to your brother and yourself to avoid future estate taxes. So, Dad agrees because the house will eventually go to you all anyway and he transfers the home thinking it’s a good way to protect the property and continues to give him a place to live.
Fast forward two years, and Dad declines further. He can no longer safely live at home and needs long-term care in a nursing home, and Medicaid is the only way to cover those expenses. Here’s the problem – Jim transferred his home to his children just two years ago, Medicaid considers this a disqualifying transfer. This means that Jim may face a penalty period, where he will be ineligible for Medicaid benefits. The penalty period could last several months or even longer, depending on the value of the house and the cost of care.
Here’s the kicker: Medicaid doesn’t care that Jim’s children were the recipients. The transfer is considered a gift, and because it occurred within the five-year look-back, it affects Medicaid eligibility.
Example #2: How about gifting Money to Family Members – the IRS lets you do this without a penalty every year up to a certain amount, right? 2025 that number increased to $18,000.00.
Let’s consider Martha, a 70-year-old woman with a savings account of $100,000. She’s always been generous with her family, especially her grandchildren, and has given them money for special occasions over the years.
However, Martha begins to experience mobility issues and realizes she may need long-term care in the future. She decides to give away a significant portion of her savings—$50,000—to her grandchildren, figuring it will help them with their education and future.
Now, when Martha applies for Medicaid in the future, Medicaid will review the last five years of her financial history, including the $50,000 gift. Since Martha made this transfer within the five-year window, Medicaid will impose a penalty period. This means Martha won’t qualify for Medicaid right away. The penalty is based on the total amount of the gift and the cost of nursing home care in her state.
If nursing home care costs $10,000 a month, Medicaid may delay her eligibility for five months (because $50,000 ÷ $10,000 = 5 months). This penalty period doesn’t go away even if Martha needs care urgently—she’ll have to pay out-of-pocket for those five months, and only after that will Medicaid step in to cover her long-term care expenses.
Example #3: Selling Assets for Less Than Fair Market Value and not at “arm’s length”
Let’s say Tom, a 75-year-old man, owns a cabin that’s valued at $200,000. His health is deteriorating, and he anticipates needing long-term care in the near future. Tom wants to make sure his family keeps the cabin, so he decides to sell it to his niece, Rachel, for only $50,000, far below the market value.
At the time of the sale, Tom believes this is a smart move to keep the cabin in the family while also reducing his total assets. However, Medicaid views this as a gift—even though he sold the property. Since he didn’t receive the full market value, Medicaid will consider this a below-market sale, and it will count as a transfer of assets.
Because this transaction occurred within the last five years, Medicaid will impose a penalty period based on the value of the gift, which is the difference between the market value of the cabin ($200,000) and the sale price ($50,000), or $150,000.
If nursing home care costs $10,000 a month, Medicaid may impose a 15-month penalty ($150,000 ÷ $10,000 = 15 months). During this penalty period, Tom won’t be eligible for Medicaid benefits, and he will have to cover the full cost of his care on his own.
Example #4: Paying Off Debts or Giving Gifts Right Before Entering Care
Let’s imagine Betty, a 79-year-old woman with some savings, decides to pay off the mortgages and loans of her children a few months before she enters a nursing home. Over the course of six months, she writes checks totaling $60,000 to her children to help them out.
Betty’s children appreciate the help, but when Betty applies for Medicaid a few months later, those transfers become problematic. Medicaid will consider the payments as gifts, even though they were made in good faith. Since the transfers occurred within the last five years, the gifts will trigger a penalty period.
If nursing home care costs $10,000 per month, Betty could face a six-month penalty ($60,000 ÷ $10,000 = 6 months). This means that Betty will have to pay out-of-pocket for her care for six months before Medicaid will step in.
So, as you can see, the five-year look-back period is incredibly important when it comes to Medicaid eligibility. Even if the transfer of assets seems like a good idea at the time—whether it’s transferring a home to a child, gifting money to grandchildren, or selling property below market value—it could result in a penalty period that delays your eligibility for Medicaid benefits.
But what can you do to avoid this? Let’s take a look at a few strategies that can help you plan ahead and protect assets, while still meeting Medicaid’s eligibility criteria.
Now it is important to note that not everyone will qualify for Medicaid because its income based. And there are some strict guidelines on transfers and the amount of income you can have in order to qualify. That being said – even if you do qualify you will have to find care in a nursing home that accepts Medicaid. Did you know that not all nursing homes do? That’s another issue.
Strategies that might help you with Medicaid eligibility.
Strategy #1: Medicaid Asset Protection Trust (MAPT)
One way to avoid the penalties associated with the five-year lookback is by setting up a Medicaid Asset Protection Trust. This trust is specifically designed to protect assets, such as a home or savings, from Medicaid’s asset tests while still allowing the individual to qualify for long-term care.
Let’s say Susan, a 70-year-old woman, wants to protect her $300,000 home from being counted as part of her assets for Medicaid eligibility. With the help of an elder law attorney, Susan sets up a Medicaid Asset Protection Trust. She transfers the home into the trust, which is now owned by the trust, not Susan. The beauty of this trust is that after five years, Susan will no longer be penalized by Medicaid for the transfer, and she will still be able to apply for long-term care benefits. It’s important to note that once assets are transferred into an MAPT, they are no longer considered part of the individual’s estate, and they can’t be accessed by the individual. This can be a great way to protect the home or other assets, but it requires advanced planning.
Strategy #2: Miller Trust
If your aging parent’s income exceeds Medicaid’s allowable limit, a Miller Trust can be a helpful tool. A Miller Trust is also known as a Qualified Income Trust (QIT). It’s used to help individuals whose income is too high to qualify for Medicaid long-term care benefits.
Let’s take George, a 75-year-old man, who has a monthly income of $3,500 from his pension and Social Security. The Medicaid income limit in his state is $2,500, so George wouldn’t qualify for Medicaid because his income is too high.
However, George sets up a Miller Trust. He deposits his income into this special trust each month, and Medicaid considers only the amount in the trust when determining eligibility, not his entire income. This allows George to qualify for Medicaid while still keeping his income protected in the trust. The funds in the Miller Trust can be used to pay for his care or other qualified expenses, but they cannot be spent freely. It also doesn’t eliminate the probability of recovery upon George’s death.
Strategy #3: Revocable Living Trust
Now, let’s talk about a strategy that may appeal to individuals who want to retain control over their assets: the revocable living trust. This trust is particularly useful for estate planning, as it allows you to keep control of your property while planning for the future.
In states where a residence is exempt for Medicaid qualification like here in Tennessee, a revocable living trust can be an attractive option. Let’s say Helen, a 72-year-old woman, owns a home worth $250,000, and she lives in a state where the primary residence is not counted as an asset for Medicaid eligibility purposes. Helen can create a revocable living trust, transferring her home into it. This allows Helen to retain control over the property during her lifetime—she can sell it, refinance it, or live in it as she pleases—but at the same time, it will be protected from Medicaid’s asset tests if she needs long-term care.
However, if Helen lives in a state where the residence is subject to Medicaid estate recovery—meaning that Medicaid can recover the cost of care after her death through probate—the revocable living trust may not provide the same level of protection as a Medicaid Asset Protection Trust. In such cases, Medicaid could potentially place a lien on the home during probate to recover the cost of care.
Even with that limitation, the revocable living trust can still be a great option for individuals who want more flexibility and control over their assets while avoiding the complex rules of Medicaid asset protection.
In summary, the five-year look-back period is something you need to keep in mind when helping your aging parent or loved one prepare for Medicaid. The best strategy is to plan ahead, consult with professionals, and make sure all financial transactions are done according to the rules to avoid penalties.
If you’re concerned about Medicaid eligibility, consider strategies like a Medicaid Asset Protection Trust or a Miller Trust to protect assets and still qualify for long-term care benefits. And if you prefer to retain control over your assets, a revocable living trust might be a great option—just be sure to understand how it works in your state. Here in my area, you can reach out to me and schedule a strategy session where we can work on your personalized estate plan – care plan in place that works for you and meets your needs.
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