What is the 5-year lookback rule and how can I plan around it?

Jul 25

The average cost of nursing home care in Massachusetts is now currently hovering around $12,000 to $13,000 per month and the average stay at a nursing home is about 835 days (although I’ve seen reports that vary widely on that estimate).

Since many people can’t afford to pay around $150,000 per year (and may be afraid of being the outlier that is in a nursing home for longer than the average stay), it’s not uncommon to wonder about Medicaid planning (called MassHealth in Massachusetts) and whether you should do specific estate planning to mitigate your financial risk associated with going into a nursing home.

More importantly, the question that often comes up is: should you start thinking about MassHealth planning now because of the 5-year lookback period?

What is the 5-year lookback rule and how can I plan around it?

The 5-year lookback is a way for MassHealth to determine when a transfer / gift is countable for purposes of determining eligibility for Medicaid.

Under MassHealth rules, you are generally required to spend down most of your assets to qualify for MassHealth, but if you’ve made a gift - whether it be cash to help your grandchild put a down payment on a home, a car, or just because - then MassHealth will add it back into their formula when determining your eligibility status.

The reason for this is obvious - the state doesn’t want you to give away all your money and then apply for government benefits. And by making that rule extend out 5 years, they made it much harder for you to accurately plan ahead. In other words, it’s virtually impossible to guess with reasonable certainty whether you are going into a nursing home over 5 years from now.

If you do have gifts within that time 5-year lookback period, then you will have to calculate the penalty for such transfer amount by using a divisor specified in each state. In Massachusetts, the penalty divisor is currently $410 per day (as of 2022) - meaning you would divide the disqualifying gift by that amount to determine how long you would have to wait for state benefits to kick in (and your family would be responsible for the costs in the meantime).

I think MassHealth would have pushed it out the 5-year lookback even further (and you may have heard rumors on it being pushed to 10 years), but auditing 60 months of banks statements is brutal enough for most families and most likely not feasible from an administrative perspective.

So what are your options to plan for the 5-year lookback?

4 Ways to Plan Ahead for MassHealth

When it comes to MassHealth / Medicaid Planning, you typically have four options:

Option #1: Medicaid Asset Protection Trust

Also known as a MassHealth Trust or Irrevocable Income Only Trust - this type of trust is designed specifically to protect your assets from being considered “countable” for MassHealth purposes. Please note that states can vary in the administration of Medicaid benefits, which would mean your irrevocable trust should generally be designed for the state you intend to live in for the rest of your life.

In Massachusetts, these irrevocable income only trusts must pass the “any circumstances test” - meaning you can no longer have access to the principal of the trust under any circumstances - and you (the creator / grantor of the trust) cannot serve as trustee. Instead, you generally pick one or more of your children to be the trustee or the manager of the trust. There are many nuances to this trust, so if you’d like to learn more about the irrevocable trust option, then you may want to check out The Minefield of Medicaid Trusts.

Option #2: Life Estate Deed

If your primary concern is protecting your home, then a life estate deed is seen as a more affordable option to achieve a similar result - protecting the asset from the nursing home so it can pass onto your children or whoever you name as the remainder beneficiaries.

The deed on your home would be drafted so you are allowed exclusive use and occupancy of the home, but you could not sell or refinance the home without your children’s consent.

The question then becomes: why wouldn’t everyone do a life estate deed over an irrevocable trust?

There are 3 reasons why clients hesitate to do life estate deeds (and why I generally don’t recommend them):

1. Increased Creditor Risk - although the life estate deed is designed to protect you from a nursing home situation, when you add your kids names to the deeds (even though they are just remainder beneficiaries), if they get into trouble - whether it’s divorce, bankruptcy, lawsuits, creditors, etc. - they could attach the house, which thereby adds a a different layer of risk.

2. Potential Tax Issues – if you decide to sell the home, and assuming your children consent to that sale, then the sale proceeds wouldn’t all go to you. Instead, the proceeds would be split among you and your children depending upon your age at the time of the sale.

The beneficial interest percentage (between you and the remainder beneficiaries) depends on your age, because the IRS uses lifetime tables to determine the percent allocated to the remainder beneficiaries versus the lifetime beneficiaries (i.e. you).

This means that the portion going to your children is going to be subject to capital gains tax. It also means that you are reliant on your children because a portion of the sales proceeds would be going directly to them instead of you. Whereas, if you did the irrevocable trust, all of the proceeds would’ve been attributable to you from a tax standpoint so you get the full $250,000 / $500,000 personal residence exemption on the sale of the home for tax purposes AND you know that all of the proceeds could then go to purchasing a different property for you or investing that money in income producing assets for your benefit only.

So in the event of a potential sale, you’re much better off with an irrevocable trust rather than a life estate deed. In practice, it is common for clients to have to sell their current property to downsize or find more preferable living arrangements, so that make the flexibility of irrevocable trusts an attractive benefit and advantage over the life estate deed.

3. Less Flexibility - In addition to the sale complications mentioned above, with a life estate deed, once the deed has your children’s names on it, then you’re locked into those beneficiaries, meaning you no longer have control over switching remainder beneficiaries as circumstances change.

But with an irrevocable trust, you could have something called a limited power of appointment. This is a fancy way of saying you can actually adjust the beneficiaries among a certain class of people. This is a great indirect way for you to have control because your kids know that if they do something you don’t like, then you can effectively change the percent or share that would’ve gone to them.

Naturally, you don’t want to have to rely upon that, but just knowing it’s there can provide some peace of mind. Since peace of mind is a major benefit of estate planning, that indirect control mechanism of being able to switch around beneficiaries cannot be overlooked.

In a similar vein, with the irrevocable trust, you have the ability to replace any trustee for any reason, which is another indirect control mechanism that may give you more flexibility than a life estate deed would.

Option #3: Gifting Assets Directly

Under this option, it is exactly what it sounds like - instead of doing a life estate deed or an irrevocable trust which have strings attached, you could simply gift the property outright to your kids.

The downside to this approach is obvious - once you give it away, it’s no longer yours. It’s completely your kids and is subject to all of the risks associated with a life estate deed with none of the benefits.

The good news about this approach is it’s by far the cheapest and most simple on the front end, but on the back end it can certainly have problems.

For example, imagine you gifted all of your assets to your kids, and then had to ask them for money to pay your bills or to do any other routine task associated with your house. As you can imagine, not many of my clients are okay with the idea of asking their kids for money, so this option is almost never used (but still worth noting).

Option #4: Do Nothing

Now when I say do nothing, I’m not saying you’re not doing estate planning, but what I am saying is you’re not doing certain estate planning for nursing home care specifically.

The reason why many clients use this approach is because they want to stay in full control of their property - no surprise there - and they understand the risks of the averages (stated at the beginning of the article). In other words, they have taken a calculated risk based on their preferences and financial situation.

These clients also realize that there are certain exceptions to the rule that may apply to them.

For example, if you are married and if only one of you is going to a nursing home, then under Massachusetts law (as of the time of this writing) you are allowed to transfer that home to your spouse without penalty.

In other words, you can qualify for MassHealth benefits and not have to give up your home if your community spouse is still healthy and living in the home. Since the home is such a crucial aspect of most nursing home planning, knowing that you have that option and that it doesn’t trigger the five-year look back can be a very powerful tool.

There is another carveout called the child caretaker exception, which allows you to transfer the home to your child without the 5-year look back penalty, but only if you can show that the child’s care allows you to stay out of the nursing home or long-term facility for at least two years, and that the home is also the child’s primary residence. You would need medical records / doctor’s notes to evidence this just to be safe.

Then there is the fact that MassHealth doesn’t consider your home a countable asset if you are under a certain equity amount at the time of your application and if you intend to return home. That intent to return home is an important checkbox, so make sure you don’t miss it.

Since the three above rules can provide alternative ways to protect your primary home, you may feel some reassurance when it comes to MassHealth planning and the 5-year lookback rule.

In Summary :

If you want to plan around the 5-year look back, then you can either do an irrevocable trust and transfer your property to it, you can protect your home by doing a life estate deed, or you can give the asset to your children outright.

Those three options all require the five-year look back. Meaning that you need to wait five years after the transfers in order to be able to qualify for MassHealth or Medicaid benefits without being penalized. Put differently, you need to do them 5 years in advance.

Any gifts that you make within the 5-year lookback will be penalized and push back your state benefits accordingly.

In the alternative, you can do a more standard estate plan which usually entails a revocable trust that allows you to retain full control of the property and all of your assets, and rely upon the state carve outs (like the spousal exception or the child caretaker exception). Or you can just live life to the fullest and enjoy the money now while you have it.

I like the last option the most, but that’s just me.