Two year spend-down exclusion when a child takes care of an elderly parent in parents' home?

What both of you are saying is logical. In this case there were other assets to pay for a NH for several years, so the house was never in immediate jeopardy of being taken. That may be a decision point. I don't know for sure, but it's logical.

The house is an old mansion, rough shape, but still pretty valuable.

What blew it in our case, fortunately, is the house was owned by a family trust. What I have learned since is the house has to be owned by the elderly person(s): in their name(s).

I don't know how strict they are about it, but the MERP exclusion is for a caregiver who was living there for two years caregiving who would lose their home otherwise. Your situation seems more like trying to preserve assets for the family.

If the value of the house is low enough, they might not even go after it. You would need to consult an expert to get an answer on this, as it's not straightforward.

If you are referring to doing a spend-down to qualify for Medicaid, the look back period for finances is 5 years. So if they applied today, it could be a review back to August, 2008. Now whether or not the review goes back that far, could or could not happen but you need to be aware of that possibility. My mom had to supply documents on her finances for 3 years and 6 months to the date of her application.
The spend-down looks at all spending. Their giving you money without a valid personal services contract, seems to be viewed as gifting of $ from them to you and penalized.

You kinda have an number of different concerns going on and really as Medicaid rules are different for each state (the states administer Medicaid under an overall federal guideline but in tandem with their state laws), you should pull your elders documents together and go an see an elder law attorney. Ideally one who has a practice in the county in which the property is located. How your state views trusts is going to be super important as they are not always Medicaid compliant.

About the caregiver issues, I think you are thinking that there might be some sort of exclusion of the home because of this? MERP (estate recovery) has an exclusion (of the home) for caregivers who live in the home and provide for full-time care for a period of time prior to NH admission. There are also lots of other MERP exclusions, all of which have to be filed for in a timely manner after the elder's death in order to be reviewed by MERP (so they can decide whether to go after the house by a claim or lein on the estate). Speak with legal on that too.
Good luck.