Understanding government’s 5-year look-back rule

Ensuring appropriate medical care for a loved one in old age can be a challenge. Health insurance only covers so much. Estate planning may provide the means to ensure maintenance of needed care through Medicaid, the combined state and federal government program for those in financial need, without exposing hard-earned assets to possible government recovery. But it requires careful, strategic planning that might need to be started years ahead of time

Consider the so-called “look-back” period. The government doesn’t want to be on the hook for medical care delivered under Medicaid if it can show that you had the financial wherewithal to cover some of the expenses. So, when officials receive an individual’s application for coverage, auditors have authority to look back as much as five years into the person’s financial history and assess penalties against monetary gifts or asset transfers made during that time.

Since any transfers earlier than five years prior to the application date are exempt from recovery efforts, the benefit of thinking long-term and being pro-active in employing available estate planning tools becomes clear.

Here’s a hypothetical that may help illustrate the point. Imagine you anticipated needing nursing home care before the end of 2018. In preparation for that, and to qualify for Medicaid, you began gifting $10,000 a year to your only child starting in 2013. No taxes will be owed on those gifts because they are within the IRS gifting guidelines. They could, however, be subject to a Medicaid penalty.

And here is one other thing to think about. Whether your application for Medicaid support is for home-based care or from a senior living facility, the application process can be complicated. So, in addition to creating an estate plan that delivers optimal protection based on your unique circumstances, working with an attorney helps ensure that steps are taken when they are needed to meet government-set time frames.

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