The Deficit Reduction Act of 2005 places severe restrictions on your ability to transfer assets prior to qualifying for Medicaid coverage. Specifically, the new law extends the lookback period from three years to five years for all transfers, not just transfers in trust as was the case under prior law. Additionally, the new law changes the start of the penalty period for transferred assets from the date of transfer to the date when the individual transferring the assets enters a nursing home and would otherwise be eligible for Medicaid coverage. In other words, the penalty period does not begin until the nursing home resident is out of funds, meaning she cannot afford to pay the nursing home.

Other significant changes include disqualifying anyone who has home equity in excess of $500,000. While some states can raise this threshold up to $750,000, even at the higher rate, this change could affect people in certain neighborhoods.

Anyone contemplating Medicaid or estate planning must act quickly. The new federal law applies to all transfers made on or after the date of enactment, February 8, 2006. However, the law gives states that must pass legislation to meet the new requirements more time to come into compliance. This gives many people in most states a little time to plan.