Avoiding Transfer Penalties: How to Identify Successful Strategies to Remove Penalties on Medicaid Eligibility for the Skilled Nursing Facility Operator
Medicaid is the primary payer for 63% of nursing facility residents, propping up a large part of the industry’s funding.1 Yet, the process of obtaining Medicaid benefits still proves to be a significant challenge for many nursing facility residents. When an indigent resident of a nursing facility is not qualified for Medicaid, the cost of their care often ends up being written off as bad debt by the nursing facility. For this reason, many nursing facilities employ staff or retain outside consultants to assist their indigent residents with the Medicaid application process. The process almost always involves obtaining five years of bank statements, wrestling with a pension provider or two to verify gross income, and sometimes speaking with the resident’s family members or friends about a few checks the resident wrote to them for myriad reasons within the last few years before the resident was admitted to the skilled nursing facility.
If you were to speak with an elder about their finances, to ask them why they wrote a $2,000 check four years ago, or how they spent the $500.00 they withdrew from the ATM two years ago, you will likely find that they have no recollection, as many people wouldn’t! People don’t recall trivial bookkeeping tasks, and many people in their twilight years didn’t heavily utilize credit or debit cards, instead opting for cash, which is far less traceable. State Medicaid agencies will turn a critical eye toward any and all unexplained or uncompensated transfers that occur during the five-year period prior to the application date (known as the “lookback” period). These unexplained transfers often result in issues with qualifying for Medicaid benefits. The State Medicaid agency, as it is authorized by Federal law, will impose a penalty period upon the applicant’s eligibility for the disqualifying transfer of assets.2
A Penalty Period is defined as the time during which an applicant is unable to receive payment for long-term care Medicaid benefits because he or she gave something away or sold an asset for less than it was worth. The idea behind this is that the government does not want people giving away assets that could be used to cover the cost of their long-term care stay/medical needs just to become eligible for Medicaid benefits. As a result, they take a close look at any assets that have been given away or sold for less than they were worth to see why those actions were done and whether a penalty should be assessed.
The length of a Penalty Period is determined by dividing the value of the asset that was transferred by what the Medicaid agency determines to be the private pay cost of a nursing home in your state. In some states, they use a monthly average of the cost of care. For example, if you live in a state where the average monthly cost of care has been determined to be $5,000, and you give away assets worth $100,000, you will be ineligible for benefits for 20 months ($100,000 / $5,000 = 20). In other states, they use a daily rate. The Penalty Period begins to run from the date that the applicant was in a nursing facility and was found to be otherwise eligible for Medicaid benefits.
Thankfully, there are numerous ways to avoid Penalty Periods. First and foremost, a transfer between spouses is excluded from the transfer penalty rules.3 Likewise, transfers to or for the benefit of a child under the age of 21, a blind or disabled child, or to a trust benefiting a disabled person under the age of 65 will not penalized.4 These penalties can easily be rebutted by providing documentation, such as a marriage certificate, a birth certificate, and a disability determination made by the Social Security Administration or other government agency.
There are transfer rule exemptions that speak directly to instances where the applicant transferred ownership of their primary residence. This type of transfer occurs regularly, normally as part of the applicant’s estate plan. Applicants for Medicaid may have sold their property to a family member or to a third party for less than fair market value or outright gifted it to an adult child. They may have added someone to their deed without receiving compensation. They may have also transferred their property into a revocable or irrevocable trust. If the applicant transferred their interest in the property to their sibling who has been residing in the property for at least one year before the transfer and who already held an interest in the property, the Medicaid agency cannot penalize that transfer.5 This type of situation can occur when the applicant and their sibling inherit a family home. They may have lived together for years prior to the applicant going into a skilled nursing facility and seeking Medicaid benefits.
Transferring ownership of the primary residence can be easily excludable as long as the right circumstances exist. For arms’ length sales of property at less than what the Medicaid agency has deemed was fair market value of the property, sometimes the appraisal done before the sale supports the reduced sale price. The house may have fallen into disrepair, dramatically reducing its value, and the tax-assessed value utilized by the Medicaid agency likely did not take the property’s condition into account. When the applicant has outright gifted the property to a son or daughter, it may be possible to exempt the transfer from a penalty under the caretaker-child exemption.6 States vary on the exact requirements of this exemption. Still, as a basic framework, the child of the applicant must have lived with the applicant in the home for at least two years prior to the applicant’s admission to the nursing facility and must have provided care such that the applicant was able to stay in their home longer than they otherwise would have. A statement from a doctor, medical records, and statements from the applicant and the child should allow the Medicaid agency to exempt the transfer from the transfer penalty rules.
In addition to exemptions from the transfer penalty rules, there are also permissible transfers. Whether a transfer can be deemed permissible hinges on the facts leading up to and surrounding the transfer. In order to succeed, the applicant must be able to demonstrate to the Medicaid agency’s satisfaction that (1) the applicant intended to dispose of the assets either at fair market value or for other valuable consideration; (2) the transfer was made for a purpose exclusively other than to qualify for Medicaid assistance; or (3) all assets transferred for less than fair market value have been returned to the applicant.7
For example, in a case where an applicant sold their primary residence for less than what the Medicaid agency deems was fair market value, the applicant may be able to rebut that by showing that the value of the property was much less due to its condition. Alternatively, the applicant may have been facing foreclosure due to her inability to pay her mortgage. The buyer may have promised to allow the applicant to remain living in the property without needing to pay rent as a condition of the sale for less than fair market value. In order to succeed with the argument that the applicant intended to receive fair market value or intended to receive other valuable consideration, contemporaneous documentation from the time of the transfer is the most helpful, but sworn statements from the applicant and the seller about the condition of the property or the occupancy agreement will also be compelling for a caseworker or hearing officer.
If you are attempting to succeed with an argument that the transfer was for a purpose exclusively other than to qualify for Medicaid benefits, please be aware that this argument is often only successful at the appeal level. Many states do not allow their caseworkers to make this determination. It can be a difficult argument to win, but it is often the only argument that can be made, especially in situations where the applicant does not remember what they used the money for or in situations where they gifted assets for valid reasons that did not contemplate Medicaid. To support your argument that the transfers were for a purpose exclusively other than to qualify for Medicaid, you will need as much documentation as possible. Look for proof that one of the following occurred after the asset was transferred:
Traumatic onset disability (dramatic change in medical circumstances now requiring nursing home care);
Diagnosis of a previously undetectable disabling condition;
Unexpected loss of income and/or resources with value sufficient to preclude Medicaid eligibility.
If the applicant has the capacity and can sign a sworn statement or testify at the appeal hearing, that is helpful. Medical records or a statement from a primary care physician that the resident was in good health, living in the community, and did not need to contemplate the need for skilled nursing facility care is also helpful. Affidavits or testimony from the recipient of the transfer can also be useful. If all these efforts fail, there is also the possibility of seeking an Undue Hardship Waiver. If you can compel the recipient of the gift to return the assets to the applicant or to pay fair market value for the assets, the Medicaid agency will not impose a penalty for the original transfer. This also works in cases where the applicant deeded property into a revocable or irrevocable trust within the lookback period. If the property is returned to the applicant, no penalty will be imposed.
Transfer penalties imposed upon an applicant’s eligibility can be devastating to not just the applicant but to the skilled nursing facility providing the care to the applicant. With time and effort, it is possible to demonstrate to the Medicaid agency that a penalty is unwarranted. The whole process, unfortunately, is very burdensome and regularly falls to the nursing facility staff or their hired consultants because of the diminished cognitive function of their elderly residents. If you are well-versed in the arguments discussed above, you can successfully reduce or eliminate transfer penalties imposed upon residents at your skilled nursing facility.
1 Kaiser Family Foundation: A Look at Nursing Facility Characteristics Between 2015 and 2024, https://www.kff.org/medicaid/issue-brief/a-look-at-nursing-facility-characteristics.
2 42 U.S.C. § 1396p.
3 42 U.S.C. § 1396p(a)(2)(A).
4 42 U.S.C. § 1396p(a)(2)(B).
5 42 U.S.C. § 1396p(a)(2)(C).
6 42 U.S.C. § 1396p(c)(2)(A)(iv).
7 42 U.S.C. § 1396p(c)(2)(C).