One of the biggest challenges to qualifying for Medicaid and receiving benefits is divestment. Divestment is when someone makes a transfer or gives away an asset. An example is making out a check to a grandchild or putting a child on the title of your house. As I’ll explain below, there are a lot of different types of transfers that can cause divestment issues under the Medicaid rules.
When a Medicaid caseworker determines divestment has occurred, benefits will not immediately start. In other words, Medicaid will be approved, but it won’t immediately start paying the nursing home, assisted living facility, or other provider. The delay is determined by adding the amount of the transfers within the five years before applying for Medicaid and dividing that total by a number that’s called the “divestment divisor.” In 2024, that number is $10,870. So, if someone has divested $32,610, Medicaid wouldn’t pay any benefits until three months ($32,610 divided by $10,870 equals 3) has passed since the approval. A divestment penalty can be tremendous financial challenge. The Medicaid recipient will very often have only $2,000 left in his bank account and in this example, will owe the nursing home for three months of care (likely totaling $33,000-$36,000).
The Medicaid rules on divestment are not logical in many cases and can create significant financial hardships. These are the biggest pitfalls and how to avoid them:
- Withdrawing cash from a bank account. Many seniors use cash to pay their bills and live on. It’s easy to use cash to pay for groceries, gas, and at restaurants. However, consistently taking out cash from a bank account will likely cause significant divestment issues. Many Medicaid caseworkers assume cash has been given away and will treat it as divestment. Caseworkers will accept receipts and proof of how cash has been spent. However, I’ve never seen a client keep such detailed records to be able to substantiate how they spent their cash. To avoid these issues, it’s best to change someone’s financial habits and start using a credit or debit card rather than withdrawing cash.
- Gifting to family. Many seniors and their families assume gifts under a certain amount will not cause Medicaid divestment issues. They’ve heard about the annual gift tax exclusion ($18,000 in 2024) and understandably believe that if gifts are kept less than this amount each year, they won’t be considered divestment for Medicaid. Unfortunately, Medicaid doesn’t have a threshold for gifts and divestment. Technically, gifts of any amount during the five-year look back period will be divestment. In practice, small birthday and Christmas gifts may be disregarded. However, that can depend on the caseworker. If you have to provide five years of bank statements to a caseworker and all of these gifts are counted as divestment, there can be a significant penalty. To avoid these issues, it’s best to minimize gifting to family as much as possible when someone has health issues.
- Paying caregivers. There are three types of caregiving arrangements. The first is with an in-home care company. A second is with a non-family caregiver such as someone from a church or a person who worked in an in-home care company and is now doing it on the side. The last is with a family member such as a child or grandchild. Very surprisingly, the Medicaid rules apply to “all” three types of caregiving arrangements. Also, the rules are very specific and cannot be complied with without a lot of planning and attention to detail. To avoid these issues, it’s best to get advice on how to comply with Medicaid’s care giver contract rules “prior” to making payments to any caregiver.
