When to Sell the Home (Part 2)
Last week I told you that Dave called because his dad needs to go to a nursing home and he is now in “spend down mode”. He plans to sell the home, spend down the proceeds from the sale and then apply for Medicaid.
A straight forward, sound approach? No, it’s not. At least not in Dave’s case. That’s because Dave told me about gifts his Dad made to help out his brother Joe when he was out of work and Dad’s preference to draw out and use cash to meet many of his expenses.
Dave figured that he would use the cash from the sale of the home and when that is spent down to under $2000 he would simply apply for Medicaid with no problem. What Dave does not understand is how Medicaid’s lookback and penalty work.
The transfers to Joe will carry a penalty because Dad didn’t receive anything of equal value back in product or service. They are considered transfers for less than fair value. Many of the cash transactions, because they are not traceable, will also be considered transfers for less than fair value. Unless Joe can document that these funds were spent on product or service for Dad, Medicaid will assess penalties for those transactions as well.
Dave said he understood all that. What he missed, however, is a critical piece of information. The penalty doesn’t actually start until he files the Medicaid application, and meets all the qualifications required for the application to be approved. In other words, the application must be approved “but for” the transfers that result in a penalty.
Let me know show you why. If Dave does what he intends to do, he expects that the money will run out in 18 to 24 months and then he will apply for Medicaid. The State will then look back 5 years and find many of the transfers to Joe and for cash. It will then impose a penalty. If, for example, the penalty turns out to be 6 months, then Medicaid won’t start paying for care when Dad’s money runs out but instead 6 months later. Dave will have to figure out how to pay the nursing home’s private pay rate for those 6 months, which will be approximately $70,000.
If, on the other hand, Dave follows our guidance and we apply for Medicaid first, the application will be approved with a penalty. The proceeds from the sale can pay for care while the penalty is running down. When Dave reapplies after spending down the proceeds he won’t have to contend with the penalty because it has already run as a result of the first application.
For those reading this, I caution against trying this yourself. It is very fact sensitive so won’t be an option for everyone. I was able to determine that Dave’s case has the right mix of facts to make this strategy workable. It will protect Dave against having to take money out of his own pocket to fix a problem he didn’t create.
The only way to know for sure if this might help you or your loved one is to consult with a knowledgeable elder law attorney who can evaluate your case.