Short answer: Federal law exempts transfers to a spouse (or for the spouse’s sole benefit), to a blind or disabled child (or a trust solely for that child), to a trust solely for a disabled person under 65, and transfers of the home to a spouse, child under 21, blind or disabled child, a sibling with an equity interest who lived there one year, or a caregiver child who lived there two years.
The main exceptions under 42 U.S.C. 1396p(c)(2):
- Any asset to the spouse, or to another person for the sole benefit of the spouse.
- Any asset to a blind or permanently and totally disabled child, or to a trust solely for that child.
- Any asset to a trust solely for a disabled individual under age 65.
- The home to a child under 21; to a sibling with an equity interest who lived in the home at least one year before the person entered an institution; or to a son or daughter who lived there at least two years before institutionalization and provided care that kept the parent at home.
A penalty can also be avoided by showing the person meant to receive fair market value, that the transfer was exclusively for another purpose, or that the asset was returned, and by an undue hardship finding.
A spousal transfer avoids the penalty but does not take the asset out of the couple’s countable resources; the spouse at home keeps only the protected share.