What Is the 5-Year Rule for Trusts?

The phrase “5-year rule” refers to the Medicaid look-back period, a review used to determine eligibility for long-term care benefits. The purpose is to ensure that individuals have not recently transferred assets for less than their value simply to meet the strict financial limits for qualification. When an individual requires care in a nursing facility or through home-based services, the costs can be substantial.

Medicaid is a joint federal and state program designed to cover these expenses for those with limited financial means. To qualify, applicants must demonstrate that their income and assets fall below certain thresholds, and the 5-year rule prevents people from giving away resources right before applying for aid. While this is the general rule, specific regulations can vary by state.

The Medicaid Look-Back Period Explained

When a person applies for long-term care benefits through Medicaid, the agency initiates a detailed review of their financial history for the preceding 60 months (5 years). For example, an application filed on October 1, 2025, would trigger a review of all financial records dating back to October 1, 2020. This comprehensive examination is designed to identify any disqualifying transfers of assets.

Some states have established different timelines. New York, for instance, uses the 60-month look-back for nursing home care but has a shorter 30-month period for community-based long-term care. California is another notable example, as it is in the process of eliminating its asset look-back period.

A disqualifying transfer includes more than just direct cash gifts; it encompasses any instance where an asset was given away or sold for less than its fair market value. This can include deeding a house to a relative for no payment, selling a valuable collection for a fraction of its worth, or giving significant sums of money to family members. Even minor transactions, like annual gifts, can be aggregated and counted as improper transfers if they occurred within the look-back window.

The review also extends to include any transfers made by the applicant’s spouse. This provision prevents couples from circumventing the rules by moving all assets into the non-applicant spouse’s name before that spouse gives them away. Discovering an improper transfer does not result in a permanent denial of benefits but instead leads to the imposition of a penalty period, during which the applicant is ineligible for Medicaid coverage.

Calculating the Penalty Period

The calculation for the Medicaid penalty period divides the total value of all improperly transferred assets by the average private pay rate for nursing home care in that region. This divisor, sometimes called the “penalty divisor,” is a state-specific monthly amount representing what a non-Medicaid patient would pay for care.

To illustrate, consider an individual who gifted a total of $150,000 to their children within the look-back period. If the average monthly cost of nursing home care in their state is $10,000, the penalty period is 15 months ($150,000 / $10,000). During these 15 months, the individual would be responsible for covering the full cost of their care.

A frequent point of confusion is when the penalty period begins. The clock does not start on the date the improper gift was made. It begins only when the applicant is “otherwise eligible” for Medicaid, meaning they have met all other requirements, including medical need and having spent down their other countable assets to the allowable limit. This timing rule prevents an individual from waiting out the penalty period after making a transfer and then applying; they must be approved for Medicaid before the ineligibility period starts.

Role of Irrevocable Trusts

The way a trust is structured determines whether the assets within it are protected from the 5-year look-back rule. An irrevocable trust is a specific type of trust that, once created, generally cannot be altered or canceled by the person who established it, known as the grantor. When a grantor transfers assets into a properly structured irrevocable trust, they relinquish control and direct access to the principal of those assets.

This transfer is the event that triggers the look-back period. If the grantor can avoid applying for Medicaid for five full years after this transfer, the assets held by the trust are not considered countable resources for eligibility purposes. A Medicaid-compliant irrevocable trust must be structured so that the grantor cannot access the principal. While the trust might be set up to provide the grantor with income generated by the trust’s assets, any ability to withdraw the principal would render the assets countable.

The assets are managed by a third party, the trustee, for the benefit of named beneficiaries, which can include the grantor’s children or other heirs. This stands in contrast to a revocable trust, where the grantor retains full control over the assets. Because the grantor has not truly relinquished ownership, any assets held in a revocable trust are considered fully available to the grantor and offer no protection from the look-back rule. Transferring assets out of a revocable trust to another person would be the event that triggers the look-back period, not the initial funding of the trust itself.

Exceptions to the Look-Back Rule

Federal law outlines several specific exceptions for asset transfers that will not trigger a penalty period. These exceptions acknowledge certain family and caregiving situations where transferring an asset is permitted. One of the most significant exceptions involves transfers made to a spouse. An applicant can transfer an unlimited amount of assets to their spouse, often called the “community spouse,” without incurring a penalty.

Assets can also be transferred to a third party for the sole benefit of the spouse. Transfers made to a child who is blind or certified as permanently and totally disabled are also exempt from the look-back rule. Similarly, assets can be transferred into a specific type of trust established for the sole benefit of any disabled individual who is under the age of 65.

Specific exceptions also apply to the applicant’s primary residence. The home can be transferred to a “caretaker child” without penalty if the child lived in the home for at least two years immediately before the parent moved to a long-term care facility, and the care they provided delayed the need for institutional care. Another housing-related exception permits transferring the home to a sibling who has an equity interest in the home and who lived there for at least one year before the applicant’s institutionalization.