I'm placing my mother in an assisted-living facility. How do I transfer her assets to her children so that Medicaid will pay?

Most people are better off paying their own way in an assisted-living facility or a nursing home for as long as they can. For starters, it's highly unethical to transfer funds to family members simply so that the government will pick up the tab. Moreover, an elderly person has a much better chance of getting into a nice facility and receiving a high quality of care by spending his or her own dime.

Having said that, if an elderly person insists on giving the money away — and it must be that person's decision, not the beneficiaries' — the implications of that move depend on whether he or she plans to enter an assisted-living facility or a nursing home. But it's crucial to understand the nuances of both situations, since many people who enter assisted-living facilities are later transferred to nursing homes.

As far as assisted living is concerned, most states consider this community care (that is, nonmedical care), and therefore have fairly relaxed rules when it comes to transferring funds from seniors looking to qualify for Medicaid. In fact, many community-based Medicaid programs allow a person to transfer as much money as he or she wants, and then apply for Medicaid benefits on the first day of the following month without any penalties, says Bernard Krooks, an elder-law attorney based in New York.

But while the law may be lenient, this shouldn't be reason enough to have mom dole out her life's savings to her eager children. For starters, only 41 states are willing to use Medicaid dollars to pay for assisted-living expenses. And in those states, coverage can be difficult to get. (To find out which rules apply for your state, contact the local Department on Aging.)

In fact, there are only 100,000 seniors nationwide receiving Medicaid to help pay for assisted living, says Robert Mollika, of the National Academy for State Health Policy in Portland, Maine. In some states, like New Jersey and Rhode Island, this is because the programs themselves are fairly new. But in others, it's because there are strict limits on how many people at any given time can receive Medicaid. So don't be surprised if your state has a long waiting list. For this reason alone, most people pay out-of-pocket to live in assisted-living facilities

If this isn't enough of a detriment for distributing mom's assets, consider what could happen if she had to be transferred to a nursing home, which would entail converting her funding from community Medicaid to institutional Medicaid (which covers nursing homes). With this type of Medicaid coverage, states have the right to "look back" and withhold Medicaid payments to any individual who transfers assets 36 months before applying for the government benefit. The length of the penalty is determined by dividing the amount of money or other assets transferred by the average monthly private-pay rate for a nursing home in that state, according to the Centers for Medicare & Medicaid Services.

So if the state discovers someone gave away, say, $200,000, and the average monthly cost of a nursing-care facility in her state is $3,000, that person wouldn't be eligible to receive Medicaid benefits for at least 66 months (five and a half years). Placing mom's money in a trust won't get around this issue, either. For most trusts, the look-back period extends to 60 months.

Of course, this wouldn't be a problem if the adult children who received the money were willing to pay for mom's care when the time came. But too often, the beneficiaries go on spending sprees and quickly burn through their newfound cash. In these circumstances, the state has no obligation to care for the elderly person who willingly impoverished herself, says Krooks.

Another important issue to keep in mind is that, when it comes to elder care, $200,000 really doesn't go that far. So there's a good chance that someone with such limited assets will legitimately end up on Medicaid. If this is the case, it's important for that person to find a facility with a Medicaid contract from the beginning. Once a resident is admitted to a facility with a Medicaid contract, he or she can't be kicked out when the private money runs out, says Steve Barlam, president of the National Association of Professional Geriatric Care Managers.

All too often, a person will set up a residence in an independent assisted-living facility and then spend down her assets until they're gone. Then she'll need to find a nursing home that's willing to take her in based solely on her Medicaid status, which could limit her options considerably. But a person who can pay for even six months to a year of nursing-home care may be able to bypass some waiting lists at prized nursing homes. For that reason, it's worthwhile to find a Medicaid facility with multiple tiers of care so that, should mom need nursing assistance, she won't have to apply to a new home.

For more on long-term care, visit our Elder Care section.

Originally published on November 18, 2002.