On February 8, 2006, President Bush signed into law the Deficit Reduction Act of 2005. Among other provisions, the act contained changes to rules concerning Medicaid eligibility and long-term care expenses. The act extended Medicaid’s “look-back” period for asset transfers from three to five years. The look-back period exists to ensure that an individual cannot "spend down" assets just to qualify for Medicaid. The start of the penalty period for transferred assets was changed to the date when the individual transferring the assets enters the nursing home and would otherwise be eligible for Medicaid coverage.

Medicaid asset transfer rules specify a period during which a penalty may apply if an individual made a transfer during the look-back period without receiving something of equal value in exchange. This “penalty period” is determined by dividing the amount of the transfer by the average monthly cost of nursing home care in the individual’s state. The resulting figure is the number of months the individual’s penalty period will last. The penalty period begins on the date on which the individual has applied and is otherwise qualified for Medicaid.

Under the law, individuals in need of long-term care will be penalized for any gifts they have made during the look-back period regardless of the purpose of the gift. It does not matter that a moderate gift was made exclusively for a purpose other than to qualify for Medicaid, and it essentially discourages any gift-giving by individuals who have even a remote chance of needing long-term care coverage within the next five years.

Congress changed the rules on asset transfers to encourage individuals to purchase long-term care insurance if they can afford it and are medically qualified for it. Those who cannot afford the premiums for a lifetime (lifetime coverage is generally preferred) may be able to pay the premiums for a long enough period of time to cover any penalty period triggered by transferring assets. Alternatively, perhaps a policyholder's children could pay the premiums (as a means of assuring inheritance of the preserved assets).

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