In the last several columns, I have addressed the medical and financial requirements necessary for seniors to receive Medicaid assistance for long term care. You may have noticed that nowhere in those columns did I mention the so called “5 year rule,” a rule that many have heard about but do not really understand.
The “5 year rule” provides that a Medicaid applicant who has given away assets within 5 years of applying for Medicaid assistance will be penalized for making that transfer. The purpose, of course, is to prevent people from purposely impoverishing themselves by gifting to family just so that they can qualify for Medicaid assistance.
The penalty is not a monetary penalty. It is a penalty in time. Specifically, it is the period of time in which the applicant will not be eligible to receive Medicaid assistance even if there is a medical need and the applicant otherwise shows financial need.
Contrary to what some believe, the penalty is not necessarily 5 years. The length of the penalty takes into account the value of the gift and, essentially, the assistance that gift could have paid for. Thus, a gift of a small value should result in a penalty for a short period of time. However, a gift of a large amount could disqualify the applicant from assistance for a significant amount of time.
If you have already made a gift, you can potentially avoid the penalty by either having the gift returned or by being paid its value. However, because you gave up control over that asset by giving it away (breaking one of my first rules of estate planning), those may no longer be options.
Unfortunately, I have seen significant mistakes made, especially when long term care issues arise suddenly and people do not understand the requirements to qualify for Medicaid assistance. The ramifications can be dramatic. Clearly the best plan for seniors (or those approaching age 65) is to begin now, no matter what your circumstances, and evaluate your options with an appropriate professional advisor.