This article includes our answers to recent questions about Indiana’s 5-year Medicaid lookback rule. The answers also explain transfer penalties, and some property transfer strategies that elder law attorneys use to protect assets from long-term health care expenses.

5-Year Medicaid Lookback Inquiry

Could my spouse and I avoid the lookback legally by purchasing my parents’ home at fair market value? If so, could my parents then gift the purchase price however they see fit?

Avoiding the 5-Year Medicaid Lookback

You can only “avoid” a Medicaid lookback by avoiding the need for long-term health care and Medicaid help for at least 5 years after an asset transfer. However, the lookback is not the question’s real issue. The real issue is Indiana Medicaid’s transfer penalty system.

Medicaid Lookback Function

The 5-year lookback period is like a statute of limitations. The lookback protects people from transfer penalties. A transfer penalty is temporary Medicaid eligibility disqualification. The lookback period is 5 years before someone applies for Medicaid. If a person makes a gift before the lookback, Medicaid will not penalize the person for the gift.

Medicaid Transfer Penalty Explanation

Indiana’s transfer penalty disqualifies a person for Medicaid benefits if the person has transferred money or property for less than fair market value during the lookback. If a person sells something (usually to family members) for less than fair market value, the value difference is called the “uncompensated” value. Indiana calculates the transfer penalty by dividing the uncompensated value by the average cost of a 1-month stay in an Indiana nursing home ($6,527 as of July 1, 2018).

Medicaid Transfer Penalty Example

Let’s assume, for example, that a person sells a $150,000 home to family members for $130,000, and then needs nursing home and Medicaid assistance less than 5 years later. The sale would be within the lookback, so Indiana impose a transfer penalty on the seller. Indiana would consider the sale to be a sale for $130,000 and an uncompensated (or gift) transfer of $20,000. 

Indiana would calculate amount of time for the seller’s Medicaid disqualification in these steps:

  • Divide the uncompensated value by the $6,527 average Indiana monthly nursing home room and board ($20,000 ÷ $6,527/month = 3.064194883 months).
  • Convert the decimal partial month into the number of days in the partial month (Step 2: 0.064194883 months x 30.42 days= 1.952808335 days).
  • Round the number of days up to the next whole number of days (Round 1.952808335 days up to 2 days).
  • Combine the whole number of months with the whole number of days to get the complete transfer penalty duration (3 months and 2 days).

Asset Protection Transfer Strategies

The best asset protection strategy against long-term care expenses is to purchase long-term care insurance before a health crisis strikes. people that do not have long-term care insurance can sometimes protect some of their assets with other strategies, but they cannot protect all of their assets. The rest of this article describes two of those strategies in extremely basic terms.

Real Estate Sale/Leaseback Strategy

A transfer strategy that works for some families involves selling a home to family and leasing (often referred to as “renting”) it back from the family. The seller then pays rent to the buyer and continues to live in the home as a tenant. The strategy is simple, but the seller loses the homestead deduction and other property tax deductions. Additionally, buyer should insure the real estate on a commercial property owner’s insurance policy that may be more expensive than a homeowner’s insurance policy.

Real Estate Remainder Interest Sale to Irrevocable Trust

Another real estate protection strategy involves selling partial property ownership to a trust. The partial property ownership, known as a “remainder interest” assures that the trust will gain full property ownership when the seller dies. The trust is specially designed to preserve certain state and federal income tax benefits for the seller. The trust buys a remainder interest from the homeowner, and the homeowner keeps the right to live in the home (the right is called a “life estate”). A family member may contribute money to the trust to finance the trust’s remainder interest purchase. The remainder interest is worth less than the full property value, so the trust does not have to pay the full property value. The seller’s reserved property rights qualify for property tax deductions and eligibility for homeowner’s property insurance. If the seller needs nursing home care in the future, only the money that the trust pays for the remainder interest purchase is exposed to long-term care expenses.

Remainder Interest Gift to Irrevocable Trust

A homeowner with money invested in savings or other investments may want to consider a gift strategy. A gift strategy resembles the remainder interest sale to irrevocable trust plan. Instead of selling the remainder interest, however, the person may give the remainder interest to the trust. People interested in this strategy can request further details that we can provide in a brochure by requesting the brochure through our “contact us” form hawkinslaw.com.

Strategy Appropriateness

No single estate planning strategy satisfies every situation. We evaluate the appropriateness of all strategic alternatives for each client after meeting the client and evaluating the client’s family issues and financial situation. We only recommend strategies that offer valuable benefits and create minimal problems. As we have indicated in other articles, this kind of planning requires an experienced elder law attorney’s expertise. In other words, don’t try this at home kids.

About the Authors

Jeff R. Hawkins and Jennifer J. Hawkins have practiced in the areas of trusts, estates, and elder law for over 25 years. Both lawyers are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys.Both lawyers are admitted to practice law in Indiana,and Jeff Hawkins is admitted to practice law in Illinois.Jeff is also a registered civil mediator, a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation; a member of the Illinois State Bar Association andthe Indiana Association of Mediators;and he was the 2014-15 President of the Indiana State Bar Association. Find more information about these and other topics at www.HawkinsLaw.com.© Copyright 2018 Hawkins Law PC. All rights reserved.

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