Case Study: Medicaid Eligibility – Transfer Penalty
Updated: Feb 19, 2019
For a Medicaid application, Family and Social Services Administration (FSSA) will look back five years from the Medicaid application date to determine whether any uncompensated or undercompensated “transfer of assets” were made. A transfer of assets includes cash transferred, property transferred, and any total or partial divestiture of control or access of an asset.
If a transfer of assets occurred within five years and the transfer was for less than fair market value, a transfer penalty is imposed. Gifts in excess of $1,200 each year made within five years prior to applying for Medicaid will create a transfer penalty. A transfer penalty means that an individual will not receive Medicaid coverage for the penalty period. Planning ahead for Medicaid can help reduce these penalties.
Transferring assets into an Irrevocable Trust is considered a “transfer of the asset” once the asset is titled in the Trust. If the Medicaid recipient applies for Medicaid more than five years after creating certain Irrevocable Trusts and after titling the assets in the Irrevocable Trust, then there is no transfer penalty because the transfer occurred more than five years ago. After five years, the assets titled in the Irrevocable Trust are exempt so there is no transfer penalty imposed. The following case below shows an example where there was no transfer penalty imposed.
In 2000, Ada and Roy Brown transferred their home to a trust and, shortly thereafter, made the trust irrevocable. Ten years later, and two years after Ada moved to a nursing home, the trust sold the home for $75,000. In 2012, Ada applied for Medicaid and submitted documentation that the house sold for $75,000. Indiana Family and Social Services Administration (FSSA) found Ada eligible for Medicaid benefits but imposed a transfer penalty based on the sale of the home.
FSSA found the home valued at $91,900. The home value was based on the assessed value for tax purposes. FSSA calculated Ada’s penalty based on the difference between the home value and the sale price. Ada appealed the imposition of the penalty. The trial court affirmed the penalty, but the Court of Appeals reversed the decision. The Court found that the proceeds from the sale of the home were properly placed back in the trust and that the fair market value of the home was $75,000. Therefore, the Court reversed the imposition of the transfer penalty.
There was no transfer penalty imposed in the above case because Ada and Roy Brown created the Irrevocable Trust and funded it in 2000, by titling the house in the Trust. Titling the house in the Trust was a “transfer of the asset.” After five years, the assets in the Trust are exempt assets so no transfer penalty was imposed.
Even though the house sold in 2012, the funds from the sale of the house remained in the Irrevocable Trust so they remained exempt because the five years had passed. Check out our website for the Long Term Care (Irrevocable) Trust FAQ for more information.