Disclaimer: This article has been posted for general information purposes only. You should not act upon the information in this article without first retaining legal counsel.
The Medicaid Gifting Problem. Parents sometimes help their children financially. Grandparents give money to their grandchildren. Unfortunately if that parent or grandparent is admitted to a nursing home within 5 years of such gifting and needs to apply for Medical Assistance (Medicaid) long-term care benefits there could be problems, sometimes big problems. Specifically, the application for benefits could be denied for a period of time. This is known as the “Medicaid transfer penalty.” Large gifts can create long periods of ineligibility for Medicaid long-term care benefits.
Medicaid Transfer Penalty. The 2020 transfer penalty in Pennsylvania is one day for every $352.86 that was given away. This figure of $352.86 is known as the 2020 “daily penalty divisor” and represents the average daily cost of nursing home care in Pennsylvania. The penalty divisor is revised annually for inflation. To illustrate, if a gift of $10,000 has been made within the 5-year look-back, the period of ineligibility would be 28 days. $10,000 divided by $352.86 = 28 days of ineligibility. Partial days of ineligibility are not counted. There are exceptions, but parents and grandparents need to be super careful when making gifts, especially large gifts.
One major problem with the transfer penalty is that it does not commence until the Medicaid applicant is “otherwise eligible” for nursing home care. To make matters worse, it can sometimes take several months before the family receives a denial notice (Form PA-162) from the caseworker at the County Assistance Office identifying the transfer penalty as a problem.
By the time the family is alerted to transfer penalty issue, the damage has been done and can be quite difficult to reverse. The unpaid nursing home bill can result in the facility suing the family. In this situation the nursing home resident’s assets have often been depleted so there is little remaining cash to address the unpaid nursing home bill.
If it can be done safely, taking a parent out of a nursing home is one potential way to mitigate the damage and allow the transfer penalty to expire without incurring additional nursing home bills. Because nursing home placement is a last resort for most families, taking a parent home is often this is not a realistic option. Leaving the nursing home will not reverse the bill that has accrued between the date of admission and the date the gifting problem is discovered.
Children and Spouses Can be Sued. If the gifting is not addressed properly, the nursing home will be unpaid by Medicaid. The nursing home can then sue the children and spouse of the nursing home resident (any one or all of them, regardless of who received the offending gift) under Pennsylvania’s filial support law. Even the children who did not receive any gifts can be sued by the nursing home for the asset transfers a parent made to other children. (Yes, in Pennsylvania this is true.) Although there are exceptions, Pennsylvania law provides that children can be sued for their parents’ unpaid nursing home bills, regardless of fault. Nursing homes routinely use this law to file collection lawsuits against the children of a nursing home resident where the bill is unpaid. Ill-advised gifting can therefore generate litigation that impacts a whole family – not just the nursing home resident.
Nursing Home Admission Denied. Nursing homes want to avoid admitting residents who will run out of private pay money and be denied Medicaid benefits due to gifting issues. Nursing home admissions offices ask whether gifts have occurred in the 5-year look-back and sometimes review financial statements before admitting a resident. If the facility discovers that gifting has occurred, the admissions representative may be anxious about the Medicaid application being denied when private pay funds run out, and may refuse to admit the senior to their nursing facility. This means that the parent or grandparent who has made large gifts within the 5-year look-back period may not be admitted to the nursing home of choice when that care is needed.
Exception for Small Gifts. In Pennsylvania, the Department of Human Services has a policy of not penalizing certain smaller gifts. At the time of this writing, gifts that total less than $500 in a given month (in aggregate) do not cause any period of ineligibility. The exception is for $500/month total, not $500 per person per month. If more than $500 has been gifted in a given month in total, then the exception does not apply.
Adding a Child to a Bank Account. Adding a child to a checking account or savings account as a joint owner is not normally treated as a gift under Pennsylvania law, even if the addition occurred during the five-year look-back. Simply adding the name of a child to the bank account is not a transfer that would cause a period of ineligibility for Medicaid long-term care benefits. This is because under Pennsylvania law, a deposit account is owned by those whose names are on the account in proportion to their respective contributions. If the parent deposited 100% of the money to a bank account, Medicaid treats the entire bank account as a resource of the parent, even if one or more children have been added as joint owners. However, if the child subsequently withdraws money from a joint bank account, a gift is deemed to have occurred at that moment. If the withdrawal by the child is within the 5-year look-back then the withdrawn funds can give rise to a transfer penalty.
Adding a Child to Real Estate. To the extent your son or daughter does not pay fair market value for the home, a gift has occurred. Selling your house to anyone for $1 is considered a gift, and if done within the 5-years prior to an application for Medicaid long-term care benefits, can give rise to a transfer penalty and a denial of benefits.
There are a number of exceptions to the transfer penalties where a house is transferred out of the name of a Medicaid applicant. First, the transfer of the residence to a “caregiver child” who lived with the parent can be an exempt transfer if the help provided by that caregiver child kept the parent out of a nursing home for more than two years. If properly accomplished, this transfer does not give rise to a period of ineligibility for Medicaid long-term care benefits. Second, the transfer of a home to a sibling with an equity interest in the property can also be exempt if the sibling lived in the property for at least one year prior to the Medicaid applicant’s nursing home admission. Third, the transfer of resident property to a disabled child, or to a trust for the sole benefit of a disabled person, is exempt from the Medicaid transfer penalties.
Each case is different, so be sure to retain legal counsel before transferring ownership of any real estate. Although the transfer of real estate may be exempt from the Medicaid transfer penalties, there may be many other good reasons to not transfer the real estate. Be aware that avoiding the risk of loss to nursing home costs by transferring the home to a child or other person may not be in your best interest, and may subject the home to other risks of loss, such as a child’s bankruptcy, divorce, lawsuits, or unexpected death.
If a Medicaid application for long-term care benefits occurs within 5-years of a non-exempt transfer, the home can be returned in order avoid the imposition of a Medicaid transfer penalty and “cure” the problem. However, in many cases this is easier said than done. If the person who received the real estate is unwilling or unable to return it, then a lengthy transfer penalty is likely to be imposed.
There are also many tax issues to consider before making any real estate transfer. Notably capital gains tax issues need to be considered, as well as inheritance tax. Transferring your home outright to a child who does not live in the property can result in a large capital gains tax bill when your child later goes to sell the home. Also, if you give away your home yet continue to reside in it, the Pennsylvania Department of Revenue can argue that you impliedly retained lifetime rights to use an occupy the home, thereby subjecting the entire value of your home to Pennsylvania inheritance tax.
Exceptions for Transfers to Disabled Individuals. Transfers to disabled children can be exempt from the normal Medicaid transfer penalties. Public policy favors such transfers, and the laws are written in a way to not unduly restrict gifts for the sole benefit of disabled individuals. Care must be taken not to make outright gifts to children who are themselves receiving public benefits such as SSI or Medicaid. Even though outright gifts to such children would not cause a parent to be ineligible for Medicaid long-term care benefits, the outright gift to the child could render the child ineligible for Medicaid or SSI benefits. Transfers to disabled children receiving SSI or Medicaid benefits are normally best made to special needs trusts. Special needs trusts, also called supplemental needs trusts, are drafted in a way that the funds in the trusts supplement but do not supplant the disabled child’s public benefits. Gifts to non-children can also be made without causing ineligibility for Medicaid long-term care benefits, but those gifts need to be made to trusts. To summarize, gifts to disabled children can be made outright, but gifts to other disabled individuals need to be made to trusts for the sole benefit of the disabled person. These are known as “third party trusts” and they do not need to have a “Medicaid pay-back” provision.
No Exception for Annual Exclusion Gifting. Gifts within the exemption from federal gift tax are still subject to the Medicaid transfer penalty. Under §2503(b) of the Internal Revenue Code, gifts of $15,000 per person per calendar year are exempt from federal gift tax for 2020. As a result, many people believe they can give $15,000 amount away each year to each of their children without a Medicaid problem. Although there are exceptions, this belief is generally not true. If such gifting falls within the 5-year look-back, then these annual exclusion gifts can indeed result in the denial of an application for Medicaid long-term care benefits. For example, five years of annual exclusion gifts to a child, at $15,000 per year, means that there would be $75,000 of gifting in the 60-month look-back. That translates into a transfer penalty of 212 days of Medicaid ineligibility. ($75,000 divided by $352.86 = 212 days of ineligibility). It is possible to appeal the denial, or request an undue hardship waiver of the transfer penalty.
Curing the Transfer Penalty. The transfer penalty problem can be cured by a full return of the gift. Unfortunately most children and grandchildren have spent the money and are not in a position to return the funds they have received. Partial cures of gifted assets may not be accepted by the Pennsylvania Department of Human Services as reversing the transfer penalty.
Using Your Resource Allowances to Pay Nursing Home. Medicaid applicants with less than $2,349 in gross income (2020) can have up to $8,000 in non-excluded resources, such as cash in a checking account. If the transfer penalty is small enough, then this $8,000 resource allowance can be used to square up with the nursing home and address the transfer penalty caused by the gifting. For example, a gift of say $3,000 in the 60-month look-back could give rise to a 8 day period of ineligibility. ($3,000 divided by $352.86 = 8 days of ineligibility.) If the private pay nursing home rate is $390/day, then the $3,000 of gifting can cause a $3,120 problem. Instead of asking the children to return the gifted money, an additional $3,120 could be paid to the nursing home, leaving the recipient with $4,880.00, rather than the full $8,000 resource limit. Similarly, in the case of a husband and wife where one is in the nursing home, the spouse in the community is permitted to retain a larger resource allowance in order to avoid impoverishment. If the transfer penalty cannot be reversed on appeal or waived due to undue hardship, then these spousal assets can be used to address the nursing home bill caused by the transfer penalty. Certainly this can leave the spouse at home financially vulnerable.
Exceptions and Appeal Options May Exist. Before a senior makes any gifts, it is highly recommended that they seek the advice of an elder law attorney. There are exceptions to the transfer penalties, especially when the gift was for a purpose exclusively for a purpose other than to qualify for Medicaid benefits. If you have been denied long-term care benefits due to gifting that has occurred within the 5-year look-back, there are ways to appeal the denial. Our law office handles Medicaid applications and appeals primarily in Montgomery County, Bucks County, and Philadelphia County.
Robert C. Gerhard, III Esquire is the managing shareholder of Gerhard & Gerhard, P.C., an estate planning and elder law firm located in Montgomery County, Pennsylvania. Attorney Gerhard specializes in elder law, with emphasis on Medicaid Planning, Medicaid Applications, and Medicaid Appeals. He is the author of the Pennsylvania law treatise, Pennsylvania Medicaid, Long-term Care.