There are many reasons why the Medicaid program is so confusing to the general public. Perhaps, the greatest source of misunderstanding is the Medicaid penalty. And that mystification can cost literally thousands to hundreds of thousands of dollars. Allow me to explain.
The Medicaid penalty is actually a period of months of ineligibility for benefits. The more money gifted, or more accurately, “transferred for less than fair value”, the longer the penalty. Sounds fairly straightforward but it isn’t. That’s because the penalty doesn’t actually begin until the applicant files a Medicaid application and the State calculates the penalty.
Many people are entirely in the dark about these rather arcane rules and file a Medicaid application only to find out that they will have to transfer money back and spend it down first. And that decision to apply before transfers back can be a huge mistake. What if all the money can’t be returned? Returning part of the gift should at least reduce the penalty, right?
Well, not necessarily so. Recently, New Jersey changed its position on partial gift returns, indicating that its interpretation of Medicaid laws now leads it to conclude that only when all the money is returned will it wipe out the penalty. And that’s one reason I am fond of telling clients and prospects that timing is everything when it comes to Medicaid.
If I can’t give back all the money Mom gifted to me, but only a part, I may be better off returning it before she files for Medicaid. Why? Because, remember, the penalty isn’t calculated until I apply and the State reviews my financial records and determines the exact length. A partial return before Mom applies for Medicaid won’t result in a reduced penalty because there is only a potential penalty at that point. If Mom transferred $100,000 to me but I transfer back ½ then when she applies for Medicaid the penalty will be calculated on $50,000, not $100,000.
The reduced penalty can save some families tens and hundreds of thousands of dollars and possible financial ruin and is another reason why it so important to get proper advice before, preferably years before, an anticipated Medicaid application is to be filed.