Section Review

Overview of Transfer Penalties for Medicaid Planning

Robert RyanRobert H. Ryan is an attorney with the law firm of Bove & Langa, P.C. in Boston.
While the information contained in this overview is intended to be accurate, it is, nonetheless, presented with the understanding that it does not constitute legal advice or professional assistance in any manner. This article is (c)Robert H. Ryan, 2002.

In general, planning to qualify for MassHealth Benefits (also known as Medicaid planning) involves planning that an individual would not normally undertake. However, if one must plan to qualify for MassHealth benefits, then the ideal plan, if it makes sense for a client, is to utilize an irrevocable income-only trust coupled with Long-Term Care (LTC) Insurance. In reality, many older clients either cannot qualify for LTC Insurance or the purchase of LTC Insurance does not fit their situation, due to cost or other reasons, and they must engage in other planning, typically involving transfers of assets. Given that MassHealth benefits are a welfare benefit program, the Division of Medical Assistance (DMA), the state agency that administers the MassHealth program, strictly scrutinizes all transfers that result in a recipient qualifying for MassHealth benefits.

There are various options available to maximize the amount of assets preserved for family members in the event an individual needs to enter a nursing home. Generally, in order for an individual to maximize the amount of assets retained for his (or her) family, he must irrevocably transfer assets from his individual name. This generally requires retitling real estate and transferring a sizable portion of assets.


Disqualification and look-back periods for Medicaid eligibility:

When property is transferred from one individual to another or to certain trusts, in most cases (there are some notable exceptions) the applicable regulations consider such a transfer as disqualifying the transferor for MassHealth benefits eligibility. The applicable regulations impose "disqualification" periods and "look-back" periods whenever a person transfers assets for less than adequate consideration prior to the application for MassHealth benefits. A "disqualification" period is essentially a penalty (or waiting) period during which an applicant for MassHealth benefits will not be eligible for MassHealth benefits. A "look-back" period (in some respects a "waiting period") is essentially a specified period measured from the application date for MassHealth benefits to determine whether assets were transferred from the applicant (or their spouse) and whether such transfers constituted disqualifying transfers.

The length of the disqualification period will be calculated by dividing the amount transferred by the average monthly cost of private pay nursing home care, more commonly known as the "transfer penalty figure," which in Massachusetts is currently approximately $6,500/ month (365 days x $214/day [effective 11/01/02] = $78,110 / 12 months). See below for a discussion relating to the determination of the transfer penalty figure.

Disqualifying transfers are only important, however, if they occur within the applicable look-back period. For transfers between individuals the applicable look-back period is three years from the date the institutionalized individual applies for Medicaid, and for transfers to or from a Trust, the applicable look-back period is five years.

Example: Assume an individual makes the $400,000 transfer to his child on Nov. 1, 2002, and thereafter applies for MassHealth benefits on Oct. 31, 2005. The DMA would "look-back" three years from Oct. 31, 2005, to Nov. 1, 2002, and "capture" the Nov. 1, 2002, gift of $400,000 (a disqualifying transfer). As calculated above, the disqualification period based upon that transfer would be approximately 61 months, or around five years and one month. Thus, the individual applying for MassHealth benefits would be ineligible for MassHealth benefits until approximately Dec. 1, 2008.

However, and here is the importance of the look-back period, assuming the same Nov. 1, 2002, transfer, if the individual seeking benefits waited until Nov. 2, 2005, to apply for MassHealth benefits, the DMA would only "look-back" to Nov. 2, 2005, (three years) and the Nov. 1, 2002, $400,000 transfer would be disregarded. The individual would be immediately eligible on Nov. 2, 2005, for MassHealth, assuming no other disqualifying factor was present. In the above example, if the transfer was made to a trust, then the three-year look-back period would be extended to five years, and the individual would have to wait until Nov. 2, 2007, to apply for MassHealth benefits, because the transfer would otherwise have disqualified him for a period in excess of five years.

Understanding the importance of the distinction between the look-back period and disqualification period is imperative in planning for individuals with a high net worth. Although MassHealth is a welfare benefit program, there can be situations where a couple with a high net worth may seek to preserve their assets in the event one spouse must enter a nursing home. For instance, in a situation where a couple may be in a second marriage, each having children from their first marriage and each having a vacation home as well as other assets they wish to pass to their own children, it is conceivable that the combined assets may have a value of $2 million or $3 million. If one spouse has an illness that indicates that the institutionalized spouse may have to be institutionalized for a very long time, or the remainder of his or her life, it is possible to transfer a significant amount of the assets and still qualify for MassHealth benefits. Clearly, more advanced planning is required for individuals who have a high net worth, which would likely include the use of irrevocable income-only trusts and possibly substantial lifetime gifts. Therefore, individuals involved in this type of planning for asset transfers of substantial value must pay particular attention to the look-back periods and must wait to apply for MassHealth benefits until the appropriate three- or five-year period has passed.


Tacking of disqualification

All transfers of assets made within a month are treated as having occurred at the beginning of the month. Therefore, the period of disqualification relating to disqualifying transfers will be measured from the first day of the month in which transfers of assets occur, even if they are made on the last day of a month. It is important to note that if the process of transferring assets is drawn out, new waiting periods for disqualifying transfers can be created, resulting in longer periods of disqualification.


Curing transfer penalties

In the event an institutionalized spouse or community spouse exhausts the funds set aside for the private payment of nursing home costs during a period of disqualification, they may "cure" some of the transferred funds in order to shorten the disqualification period. This means that a recipient of transferred assets will need to return some or all of the assets to the applicant. The MassHealth regulations state that where the full value or a portion of an amount transferred is returned to the applicant for MassHealth benefits, the period of disqualification will be adjusted accordingly.


Transfer penalty - determination of transfer penalty figure

For many years, the transfer penalty figure used by the DMA to determine the period of disqualification for transfers of property was not based on the actual average nursing home costs in the state. Although experience indicates that nursing home costs can run, on average, $6,000 to $7,000 per month in Massachusetts, the DMA did not base the transfer penalty figure on actual costs incurred by a private pay applicant. The DMA, under pressure from a four-year legal battle by Attorney Brian Barreira, an elder law attorney in Plymouth, raised the transfer penalty figure to an average of approximately $5,500 per month in February 2002. Most recently, on Aug. 29, 2002, the DMA entered a consent decree in which it agreed to base its transfer penalty figure on actual nursing home costs and raised the figure to an average of approximately $6,175 per month. In actuality, the transfer penalty figure is expressed as a daily figure and as of Aug. 29, 2002, was $203 per day. As part of the consent decree, the DMA agreed to update the transfer penalty figure every November, beginning November 2002, based on actual nursing home costs. We understand that the DMA has raised the figure to $214, effective Nov. 1, 2002, although the DMA has not made that public yet.

Although the increased transfer penalty figure is most applicable to those engaging in current planning to qualify for MassHealth benefits or who are currently in the process of applying for MassHealth benefits, it is extremely important for those currently waiting out a period of disqualification, prior to applying for MassHealth benefits, based on prior transfers which would constitute disqualifying transfers. Pursuant to the DMA regulations, an applicant subject to a disqualification period for MassHealth benefits will very likely be able to reduce the period of disqualification based on the increased transfer penalty figure since the period of disqualification for the transfer of assets is based on the transfer penalty figure in effect when the applicant applies for MassHealth benefits. Therefore, even though a period of disqualification is estimated at the time a transfer is made, which would constitute a disqualifying transfer if the applicant were to apply during the look-back period, it is important for an applicant to be aware of the scheduled transfer penalty figure increases in order to determine whether the waiting period, based on an estimate of a period of disqualification, can be shortened.

©2017 Massachusetts Bar Association