When it comes to protecting assets from the high cost of long-term care, few strategies are as powerful—or as misunderstood—as placing your home in trust. In my practice, I work with clients every day who are either actively receiving care in a nursing home or assisted living facility, or who are planning ahead to safeguard their savings and property in case they need such care in the future.

The Five-Year Lookback—Still Five Years, Not Seven

Preplanning for Medicaid often revolves around one crucial rule: the five-year lookback period. Contrary to popular belief, this period has never been seven years—despite a persistent rumor that’s been floating around for two decades.

The lookback period means that when you apply for Medicaid, the state will review your financial transactions for the past five years to see if you’ve given away assets. This is because Medicaid is designed for those with limited means—typically no more than $2,000 in countable assets for an individual. (Married couples may be allowed to keep more, but that’s a topic for another day.)

Why Gifting Can Hurt You

Medicaid will pay for long-term care, but it also has strict rules to prevent people from simply giving away their wealth to qualify. If you’ve made significant gifts during the five years before you apply, you’ll be hit with a penalty period—a span of time during which you’re ineligible for benefits.

Here’s the problem: since you must spend down your assets before applying, you may find yourself with no money and no Medicaid coverage during that penalty period. This can put you at risk of being discharged from a nursing home or assisted living facility for non-payment.

A Real-Life Example

Consider Mrs. Smith. She’s living in a nursing home that costs $15,000 per month. She applies for Medicaid when she has just $1,000 left. The state reviews her past five years of bank, brokerage, and annuity statements and discovers gifts totaling $50,000:

• $10,000
• $15,000
• $5,000
• $20,000

These amounts are added together, and the $50,000 is divided by New Jersey’s current penalty divisor—$12,270, the average monthly cost of a nursing home in the state. The result: a penalty period of four months.

That means Mrs. Smith must pay for her care out-of-pocket for four more months—an impossible task with only $1,000 to her name.

How an Irrevocable Trust Can Help

One of the most effective strategies I recommend is transferring a home into an irrevocable trust, with the client’s children as trustees and beneficiaries. Here’s why:

• It starts the five-year clock. Once the transfer is made, the lookback period begins. After five years, Medicaid can’t penalize the transfer.
• It protects the home. Properly structured, the trust shields the property from lawsuits, divorces, or creditor claims against the children.
• It preserves tax benefits. When the client passes away, the family still receives the valuable “step-up in basis,” which can significantly reduce capital gains taxes if the property is sold.

The Bottom Line

Medicaid planning is complex, and the stakes are high. Waiting until care is needed can limit your options and expose your assets to risk. By placing your home into a properly drafted irrevocable trust, you can protect your property, preserve your legacy, and ensure peace of mind for your family.