The Five-Year Rule imposes stiff penalties on those gifting their assets within five years of applying for Medicaid for nursing home expenses. It’s important to know how the rule works and who is penalized.
First let’s differentiate between Medicare and Medicaid.
Medicare is a national healthcare program for workers 65 or over who have paid into the system for at least ten years. It’s a government entitlement that you have paid for with your payroll taxes.
Medicaid is public assistance. It is for the poor. It is important in retirement because Medicare does not cover most nursing home expenses. Once they have exhausted what their Medicare benefits do cover, many retirees seek help from Medicaid.
To qualify for Medicaid, you must have limited assets. The limit may be as low as $2,000. It varies by state.
If your assets are higher than the allowed limit, you will need to pay for your care or ‘spend down’ what you have until you qualify. Basically, you need to spend nearly everything you own before you will be covered by Medicaid.
To avoid spending their savings, many will gift their assets to a friend or family member so that they then qualify for Medicaid. This is where the Five-Year or Look-Back Rule comes in.
Once you apply, Medicaid will review your financial records for the past five years. Any gifts or transactions where goods of an equivalent value were not received will be considered assets of the applicant.
The Penalty? Medicaid does not try to reclaim the money you gave away. It denies coverage for the ‘time equivalent’ of the gift. For instance if a nursing home in your area costs $7,000 per month and you gave away $70,000, you will not be eligible for Medicaid for 10 months. If you gave away $140,000 you would not be eligible for 20 months. The way Medicaid looks at is that you could have paid for your care for that time period with the funds you transferred.
The average cost for nursing home care in the U.S. is $81,000 per year for a semi-private room. At that amount it wouldn’t take long to deplete the average person’s savings.
In order to retain your assets, you might consider Long Term Care insurance or hire an elder-care attorney well in advance to assist in the process.