Preserving a Legacy: How to Protect Your Client’s Inheritance From Medicaid 

Alisa Lamal

Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.

The application process to qualify for Medicaid benefits can be lengthy. That’s why, once applicants become qualified for benefits, they try to avoid causing any further changes to their assets or income that could result in a change to their eligibility status. However, sometimes Medicaid recipients may be the recipient of an unexpected inheritance that can cause them to exceed Medicaid’s strict asset and income limitations. This can leave many beneficiaries wondering what can be done to preserve this inheritance without jeopardizing their Medicaid benefits.


How an Inheritance Affects Medicaid Eligibility

In most states, the maximum amount of assets that an institutionalized individual can retain while still qualifying for Medicaid benefits is $2,000. As such, receiving an unexpected inheritance can cause the recipient’s assets to exceed this limitation, impacting their eligibility. In most cases, the inheritance will be considered unearned income to the recipient in the month it is received. If the inherited amount exceeds the state’s income limits, the individual will be considered ineligible for Medicaid benefits for at least that month. If the funds are spent down within the month of receipt, the applicant will once again qualify for benefits the following month. However, any funds that are not spent down within the month of receipt will be considered an asset.

Learn More: Planning Trends and Incorporating Medicaid Planning into Your Practice


What to Do When Clients Receive an Inheritance While on Medicaid

While it may seem like an easy solution to simply refuse the inheritance, disclaiming assets is often treated as a divestment for Medicaid purposes and will result in a penalty period. Therefore, once the inheritance has been received, this change in circumstance must be reported to the state Medicaid agency within 10 days of receipt. Failing to report this change to Medicaid may result in the recipient continuing to receive benefits while they would have otherwise been disqualified. Upon the agency discovering that the recipient’s assets exceed Medicaid’s limitations, they will be required to reimburse Medicaid for the benefits that were paid while they were ineligible. This can result in a very large, unexpected bill for the Medicaid recipient to pay back before qualifying for benefits again.

Read More: When Does the Medicaid Penalty Period Begin?


Ways to Spend Down an Inheritance

Since the applicant will likely be ineligible for benefits for at least the month in which the funds were received, the first recommended expense is to pay the nursing home for the current month.

Excess proceeds that remain can then be used to purchase other exempt assets such as:

Learn More: The Logistics of a Medicaid Compliant Annuity


Medicaid Planning with an Inheritance

While receiving Medicaid benefits the applicant cannot simply give away assets to friends or family without a proper plan in place. Giving away assets is considered a divestment for Medicaid purposes which will result in a period of ineligibility. However, with careful planning, some applicants may be able to utilize a specialized spend-down strategy utilizing a Medicaid Compliant Annuity (MCA).

The Gifting/MCA strategy allows the institutionalized individual to gift approximately half of their “excess” assets to a loved one and purchase a short-term Medicaid Compliant Annuity with the remaining proceeds. The recipient will incur a self-created penalty period because of the gifted assets. However, the income from the annuity will allow the individual to pay for their long-term care during that penalty period. This strategy allows the individual to protect a portion of their assets for their loved ones while also accelerating their eligibility for Medicaid benefits.


If you have a client who recently received an inheritance and is concerned about losing their Medicaid benefits, contact our office or request an analysis from one of our Benefits Planners today!


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