When Mary sat in my office, her hands were trembling as she unfolded the Medicaid denial letter. “I don’t understand,” she whispered. “Dad didn’t do anything wrong. He just wanted to help his grandkids.”

 

Mary’s father, Richard, had always been a planner. He worked hard his entire life, saved diligently, and wanted to leave something behind for his family. A few years ago, he gifted each of his three grandchildren $15,000 to help with college tuition. At the time, it felt like the right thing to do—he had extra savings, and he wanted to see them benefit from it while he was still alive.

 

But now, just four years later, Richard suffered a severe stroke and needed full-time nursing care. When the family applied for Medicaid to help cover the costs, they were blindsided. Those generous gifts—given with nothing but good intentions—triggered a penalty period, meaning Richard would have to pay for his care out of pocket for months before Medicaid would step in.

 

Mary was devastated. “Dad always thought he was doing the right thing. He never imagined that helping his grandkids would put him in financial trouble.”

 

What is the Medicaid Look-Back Period?

Richard’s story is, unfortunately, one I hear all too often. Many people don’t realize that Medicaid has a five-year look-back period, meaning they will examine all financial transactions made in the five years leading up to a Medicaid application. If they find any gifts or transfers of assets for less than fair market value, they assume those assets were moved to avoid paying for care—and they impose a penalty.

 

For Richard, those $45,000 in gifts to his grandchildren meant he was ineligible for Medicaid for several months. Since a nursing home in Pennsylvania costs around $9,000–$12,000 per month, the family suddenly faced a bill they hadn’t prepared for.

 

How the Medicaid Penalty is Calculated

The penalty period isn’t a simple dollar-for-dollar repayment. Instead, it is divided by the state-assigned divisor.

 

Let’s break it down with Richard’s situation:

• He gifted $45,000 in total to his grandchildren.
• The average cost of nursing home care in Pennsylvania is approximately $12,000 per month.
• $45,000 ÷ $12,000 = 3.75 months of ineligibility.

 

This meant Richard had to privately pay for his care for at least 3.75 months before Medicaid would cover any of his costs.

 

The family was in crisis. They scrambled to come up with the funds, but Richard’s savings weren’t enough to cover everything. His children pooled their money together, but it wasn’t enough. They had to sell one of his investment properties to cover the gap. A well-meaning gift had suddenly turned into a financial disaster.

 

How to Avoid Medicaid Penalties

Richard’s situation could have been avoided with the right planning. Here’s what families can do to protect their assets while still securing Medicaid eligibility when needed:

 

1. Start Planning Early

Since Medicaid looks back five years, any asset transfers should be done well before that window. This means if you’re considering gifting assets, transferring property, or setting up trusts, you should do so as early as possible.

 

2. Use Medicaid-Exempt Transfers

Not all transfers trigger penalties. Medicaid allows certain exempt transfers, including:

• Transfers to a spouse
• Transfers to a disabled or blind child
• Transfers to a trust for the sole benefit of a disabled individual under age 65
• Transfers of a home to a caretaker child who lived in the home for at least two years before the applicant entered care and provided necessary care

Had Richard known this, he could have structured his gifts differently, avoiding the penalty.

 

3. Consider a Medicaid-Compliant Trust

An irrevocable Medicaid Asset Protection Trust is one of the safest ways to protect assets while still ensuring Medicaid eligibility. If Richard had placed the $45,000 into a trust instead of gifting it directly, it would have been protected—but only if it had been done more than five years before applying.

 

4. Utilize Medicaid-Compliant Annuities

If you’re already within the five-year window and need care immediately, a Medicaid-compliant annuity can help. These annuities convert assets into an income stream that Medicaid won’t count against eligibility. A specific email that is compliant with Medicaid and structured to properly serve the client would be recommended here.

 

5. Work With an Estate Planning Attorney

Medicaid laws are complicated and ever-changing. Working with an experienced estate planning attorney can help families navigate these rules and avoid the kind of financial stress that Mary and Richard faced.

 

A Lesson in Planning

Mary learned a hard lesson—one she wished she had known years ago. “If we had only talked to an attorney before Dad got sick, we could have avoided all of this,” she told me. “I just want other families to know what we didn’t.”

 

Medicaid planning isn’t just about protecting money—it’s about ensuring your loved ones get the care they need without leaving their family in financial distress. If you or a loved one are thinking about long-term care, the best time to plan is now.

 

Don’t wait until a crisis hits. Register for a workshop to learn how you can protect your assets and ensure your family’s security.