Medicaid is a system that’s available only to people who have very few assets. The government is concerned that people will “game the system” by giving away all their assets to family members and then applying for Medicaid shortly afterward. That’s obviously not fair to the taxpayers who support the system.

So Medicaid imposes a penalty on people who transfer assets without receiving fair value in return.

Typically, Pennsylvania’s Department of Human Services requires a person applying for Medicaid to disclose all financial transactions during the past five years. This five-year period is known as the “look-back period.” The Department of Human Services then determines whether the applicant transferred any assets for less than the fair market value during this time. If Medicaid decides that an applicant made such a transfer, it will impose a penalty period – a period of time during which the person will be ineligible for benefits. This period is determined by dividing the amount transferred by the average private-pay nursing home cost in the state.

Any transfer can be scrutinized. There is no exception for charitable donations or gifts to grandchildren. Informal payments to a caregiver may be considered an improper transfer if they weren’t made according to a written agreement. Similarly, loans to family members can trigger a penalty period if there is no written documentation.

The burden of proof is on the Medicaid applicant to show that the transfer wasn’t made in order to qualify for Medicaid.

However, there are some types of asset transfers that won’t trigger a penalty period. These include transfers to:

In addition, special rules apply to the transfer of a home. A Medicaid applicant can transfer his or her home to the following without a penalty:

As you can see, the rules are complex, and if you’re thinking of applying for Medicaid – even if you’re thinking of applying for it five years from now – you’ll want to speak with an elder law attorney first.