“Can I sell my house to my son for a dollar? Would Medicaid question that?” Clients have asked me these questions many times. My answer is, if you wouldn’t sell your house to a stranger for a dollar, then Medicaid would question your selling the house to a family member for a dollar.
Medicaid is a health payment plan for needy individuals. In order to qualify for Medicaid benefits, an individual must have insufficient income with which to pay for his care and must have a limited amount of assets, typically less than $2,000.
The people who hire me to help them qualify for Medicaid benefits never believed they would have to qualify for Medicaid. These are ordinary people who led ordinary but self-sufficient lives. They never depended on a government program for their basic needs (other than Social Security payments and Medicare), but they also never realized that they would need long-term care.
Long-term care can cost an extraordinary amount of money. A nursing home nowadays costs about $15,000 a month. With incidental costs, the monthly cost of care can exceed $17,000. That is a yearly cost of over $200,000.
If you worked your entire life and your house is worth $400,000 and you have $200,000 in savings, you would spend your entire net worth on long-term care in three years. If you have a spouse living at home, the spouse would be left with nothing. Understandably, the thought of paying for long-term care can be extremely scary and can push people to qualify for Medicaid benefits.
As mentioned, the Medicaid program has an asset limit, $2,000. So, one of the first thoughts a person has is, I’ll give my assets to my family then qualify for Medicaid. Of course, the people who wrote the Medicaid law understand this basic human instinct and put in place a rule that counteracts that basic human instinct.
The rule is called the Five-Year Lookback. When a person applies for Medicaid benefits, the Medicaid Office asks for their financial records/statements for the past five years immediately preceding the date an application for Medicaid benefit was filed. The office scrutinizes the statements looking to see if the applicant made any uncompensated transfers.
An uncompensated transfer occurs when the applicant gave away or sold an asset for less than the asset’s fair market value. Fair market value is defined as the price an item would sell for between people engaged in an arms-length transaction. For real estate, the value of real estate is calculated using the tax assessed value and an equalization ratio for the town in which the house is located. The State’s Division of Taxation publishes a ratio for every town in New Jersey each year.
If an applicant “sold” his house to his son for a dollar, then the applicant essentially gave his house away. That gift will result in a period of ineligibility for Medicaid benefits. This period of ineligibility for Medicaid is commonly known as a “penalty period.” The greater the value of assets that the applicant gave away within the lookback period, the longer the penalty period.
The way a penalty period is calculated is as follows: You take the aggregate of all uncompensated transfers made during the lookback period and divide that aggregate figure by a divisor number that the State publishes. The divisor number is supposed to reflect the average monthly cost of a nursing home in New Jersey. The current divisor figure is about $12,300.
So, assume that Mr. Smith sold his house (worth $400,000) to his son for a dollar. (The son never paid $1.00 by the way.) Further assume that during the lookback period, Mr. Smith gave his son $50,000. In total, Mr. Smith gave his son assets worth $450,000. Mr. Smith will be ineligible for Medicaid benefits for approximately 37 months ($450,000/$12,300 = 37). Medicaid will not pay for his care during that period of time, and Mr. Smith will have to find some other way to pay for his care.