Understanding the Medicaid Gift Penalty and Estate Recovery

It’s common knowledge that long-term care like in-home services, assisted living, and skilled nursing can be incredibly expensive.  Figuring out how to pay for long-term care can be a challenge. In many instances, families must apply for Medicaid benefits to pay for long term care.

The Medicaid application process can be confusing. One aspect of the application process that is especially confounding for applicants is the gifting rules and penalty divisor. There are many misconceptions about this area of the law. May fear that the state of Idaho will “take” their assets, or force them to repay gifts to the State. Hopefully this article will help clear up confusion in this area.

Gifting and Penalties

On the Medicaid benefit application, you will be required to respond to the following request: “Tell us about everyone in your home who has sold, transferred or given away cash, property, or other assets within the last five years.” This is known as the “5-year look-back period.” You will be required to disclose the sale of any property or any significant gifts given in the 5 years preceding the application.

 If you are applying for Medicaid and you gifted assets during the look-back period, the state will assess a penalty using the “penalty divisor.” For the year 2024, the penalty divisor is $9,726 per month or $324.20 per day, which represents the average cost of long-term care in Idaho.  The penalty is then applied to you in terms of time.

For example, if less than 5 years before submitting your Medicaid application, you gave your car (which has a fair market value of $20,000) to your son, the state will penalize you for that gift. In their view, that car was an asset that you could have sold and applied towards payment of your long-term care expenses. By instead giving the car away and applying for Medicaid within 5 years, you opened herself up for a penalty. To assess the penalty, the fair market value of the gift ($20,000) is divided by the penalty divisor ($9,726). In this case, the penalty period around 2 months. So, once you are otherwise qualified to receive Medicaid benefits, you will have to wait an additional penalty period of 2 plus months before your Medicaid benefits begin.

There is a common misconception that, if you gifted during the look-back period, the state would force you to pay a monetary penalty. That is not the case. As explained above, the state assesses penalties in terms of a length of time. That being said, one remedy available to you in this situation is to “cure” the gift to avoid the penalty.  In the above example, you could cure the gift by taking back the vehicle from your son.

 Estate Recovery
Medicaid applicants are often concerned about the state of Idaho “taking” property from them. These concerns are often confused with the gifting penalty rules described above. In reality, often Medicaid applicants are actually thinking of “estate recovery,” which is an entirely different concept.
Your primary residence is considered an “exempt” asset under the Medicaid rules, meaning that the value of the residence (up to $750,000) will not count against you in determining your Medicaid eligibility. In other words, the state will not force you to sell your house to pay for long-term care.
However, after you and your spouse have both passed away, the state will want to be paid back for Medicaid benefits provided through a process known as “estate recovery.” If your estate still owns your primary residence, the state will lien the house and/or appear as a creditor in the probate of your estate in order to be paid back. That being said, the state will not lien or “take” your house or assets while you and your spouse are still alive.
As you can tell, issues surrounding Medicaid and gifting are complex, and highly specific to the circumstances of the applicant. If you or a loved one may need to apply for Medicaid and you want to learn more about gifting penalties and exceptions, we encourage you to speak with an elder law specialist. The attorneys of Coyle & Eyman are here to help!