Ask the Expert – The 5-Year Look-Back Rule

​by Karen E. Klein with expert Jennifer B. Cona, Esq.

The Problem:  I understand that the new Medicaid rules take effect this month. What planning strategies should I be aware of for my parents, who recently retired?

The Expert:  Jennifer B. Cona, elder law and estate planning attorney, Cona Elder Law, Melville.

The Rules:  The new Medicaid laws codified a five-year “look-back” period and changed the timing of the penalty period for gifts and asset transfers. Under the new laws, if your parents do not engage in asset-protection planning at least five years before they need nursing home care, they will have to spend their assets on the cost of that care.

The Strategy:  Consider having your parents establish and fund an “irrevocable asset protection trust.” 

How it Works:   If your parents wish to protect their assets to provide you with an inheritance, they must gift or transfer those assets five years before they will need long-term health care. The best way to protect those assets is to place them in an irrevocable living trust. The trust can hold cash, stocks, bonds, and the title to their home. Your parents can get income from the trust during their lifetimes, if they choose. They will need to appoint a trustee to manage the funds, make distributions to themselves and ultimately to their heirs.  However, as the name implies, such a trust is "irrevocable" and should only be formed with the guidance of an experienced professional. "Irrevocable" means your parents will not have access to or control over the principal they place into the trust, and it cannot be amended or revoked. The assets in the trust are protected from creditors and, after five years, they will be protected from any Medicaid lien or claim as well.

The Results:  If your parents need nursing home care, they will qualify for Medicaid benefits after five years, assuming they are otherwise eligible. When they die, the assets remaining in the trust will pass immediately to the beneficiaries they have specified, without the need for probate.