If you or a loved one might need long-term care, understanding how Medicaid works can make a big difference. Medicaid can help cover expensive costs like nursing homes or in-home care, but it also has rules that can catch families off guard. One of the biggest rules is the 5-year lookback. This rule can lead to penalties if you’re not careful. With the right planning, though, you can avoid mistakes and keep more of what you’ve worked hard to save.
What Is the Medicaid 5-Year Lookback?
When someone applies for Medicaid, the government checks any transfers of money, property, or other assets made within the last five years. This is called the 5-year lookback period. Medicaid wants to make sure people don’t give away money or property just to qualify. If you have given away or sold anything for less than fair market value during that time, you could face a penalty.
That penalty is a delay in getting Medicaid help. The amount of the delay depends on how much was transferred. Medicaid divides the total value of the transfer by the average monthly cost of nursing home care in your state. That number becomes the number of months you have to wait before benefits begin.
Why Long-Term Care Planning Matters
Long-term care costs are high. A nursing home can cost over $100,000 per year. Most people don’t have insurance that covers these costs. Medicare only pays for short-term rehab care—not long-term stays. Medicaid is the main way many families get help paying for long-term care, but it has strict income and asset limits. That’s why planning ahead is important.
If you wait until the last minute, your options are limited. If you plan five or more years ahead, you have more tools available to protect your assets and still qualify for help.
Smart Ways to Spend Down Excess Assets
If your assets are above Medicaid’s limits, you might need to “spend down” some of them. But you can’t just give money to a family member. You have to spend the money in ways Medicaid allows. Some smart and legal ways to do that include:
- Home repairs and maintenance (like fixing the roof or replacing appliances)
- Buying medical equipment or supplies
- Paying for personal care services
- Paying off outstanding debts or bills
- Buying or upgrading a vehicle
- Prepaying for funeral and burial arrangements
- Paying legal fees for estate or Medicaid planning
These types of spending won’t trigger a penalty because you are getting fair value in return. This lets you reduce your countable assets while keeping your care plans on track.
Using an Irrevocable Trust to Protect Assets
One of the strongest tools in Medicaid planning is the irrevocable trust. When you move assets into this kind of trust, you give up control of those assets. That means they no longer count against you when applying for Medicaid—if the transfer happened more than five years before applying.
Once assets are in the trust, you can’t take them back or use them for yourself. Instead, a trustee manages them. This could be a family member or a professional. The trust can hold things like your home, savings, or investments. While you can’t use those assets, they can still be passed down to your children later.
Things to Know About Irrevocable Trusts
- The trust must be set up properly under state Medicaid rules
- The trustee should follow Medicaid guidelines carefully
- Assets must be moved into the trust more than five years before you apply
- You won’t be able to control or use those assets during your lifetime
- A Medicaid planning attorney can help you create the right kind of trust
Other Tools: Medicaid Annuities and Promissory Notes
If you’re already within the 5-year lookback window, or need care soon, you still have some options.
Medicaid Compliant Annuities (MCAs)
An MCA takes a lump sum of money and turns it into monthly payments. Those payments go to your spouse or back to you, depending on the situation. The annuity must meet specific rules:
- It must be irrevocable and non-transferable
- It must pay out based on your life expectancy
- Payments must be level and made monthly
- It must name the state as a beneficiary after death
Used correctly, this tool can help convert assets into income that doesn’t count against you for Medicaid.
Promissory Notes
A promissory note is a loan you give to someone—usually a family member. They agree to pay you back in equal monthly payments over your life expectancy. It has to be written clearly and follow Medicaid rules. This strategy can help reduce countable assets while still keeping the money within the family.
Start Planning Before You Need Care
The best way to protect your savings and still qualify for Medicaid is to plan ahead. Starting at least five years before you expect to need long-term care gives you the most options. Tools like irrevocable trusts, spend-down strategies, and Medicaid-compliant annuities all have rules and deadlines. You need time to set them up the right way.
Planning for long-term care can feel overwhelming, but you don’t have to do it alone. A Medicaid planning attorney can walk you through the process and help you make smart choices.
Call for Help Before It’s Too Late
If you’re worried about the Medicaid 5-year lookback rule or unsure how to protect your assets, now is the time to take action. Every family is different, and what works for one might not work for another. A customized plan that fits your needs can make all the difference. Call (910) 777-5734 to speak with our Medicaid planning lawyer who can help you start planning today.