For most people, receiving an inheritance is a pleasant experience. It’s a final gift from a relative and can either be saved, invested, or used for something that isn’t in the current budget.
Sometimes an inheritance is an unexpected surprise. However, if the recipient is on Medicaid, that inheritance can cause problems, particularly if they are in a nursing home paid for by Medicaid.
Medicaid’s Rules
Medicaid is a needs-based program separate from Medicare. It provides medical care for those without insurance or other coverage.
Medicaid’s basic premise is that an individual must be “impoverished,” with less than $2,000 in assets at any given time, and no more than $2,000 monthly income. If an individual exceeds that, he or she is no longer eligible for Medicaid.
If you have assets, you have to dispose of them one way or the other at least five years prior to applying for Medicaid. Otherwise, you’ll be required to spend those assets—including an inheritance—before Medicaid will begin coverage. This creates a conundrum for someone who finds themselves in need of more immediate care.
Because long-term care is costly, you’ll be required to use any extra funds until your assets and income go below the $2,000 threshold.
If you die with assets that total more than $14,400, Medicaid can also “clawback” any monies it finds in order to pay for as much of the long-term care as it can. This can include transfers, sales, and other transactions within five years prior to the Medicaid application. These assets won’t be passed along to your beneficiaries, even with a will.
Receiving An Inheritance
Large or small, an inheritance for a Medicaid recipient can throw a delicate financial situation into turmoil.
The extra cash brought into the tight budget can quickly cause problems. As much as someone may need that extra money, it changes the financial situation into one of “non-impoverished,” ending eligibility. Attempting to “hide” the money from Medicaid is illegal, and it must be reported.
But there are legal options available to protect the inheritance from Medicaid.
Spending Down
Depending on the size of the inheritance, it’s possible that the inheritance can be used for goods and services that the beneficiary wouldn’t have the funds for otherwise. This can include:
- Needed car repairs, or the purchase of a newer vehicle
- Needed home repairs or mobility modifications, such as a wheelchair ramp or new roof
- Replacement appliances, such as a washer, dryer, refrigerator, stove, etc.
- Replacement furniture for the home
- Paying down debts, such as credit cards or other installment loans
- Prepaid funeral expenses
- Upgrades such as a new TV, computer/laptop, or other items
- Other needed purchases that were not previously affordable
Should you decide to “spend down” the inheritance, you will still have to report it.
However, the money must be spent within the calendar month. The individual must explain to Medicaid how the money was spent and show that the countable assets went below $2,000.
Trusts For Larger Inheritances
Spending down may be feasible for a smaller inheritance, but at some point, there may not be any more things to purchase for the recipient on Medicaid.
Moving assets into irrevocable trusts is an option, but that’s not the case. As trusts go, not just any trust will do.
Medicaid does allow some trusts for the transfer of assets for recipients to keep their eligibility. They include:
- Special-Purpose Trusts
- First Party
- Third-Party
- Pooled Trusts
- Qualified Income Trusts, aka, Miller Trusts
- ABLE Accounts (for those with disabilities)
So-called “Medicaid Qualifying Trusts,” which were available prior to 1993, were irrevocable trusts that allowed the trustor to add funds into the trust but keep control of them. However, these trusts disqualified many individuals.
Consult with an estate attorney who can guide you through the process of Medicaid planning before transferring any assets into a trust of any kind.
Calendar Month: Pay Attention To Timing
When you receive an inheritance is just as important as how much. Here’s why.
Medicaid requires a recipient to have $2,000 or less by the end of a calendar month in order to maintain eligibility. The money will be considered “income” for the month in which it is received.
If the inheritance is “spent down” by the last day of the month, eligibility is preserved.
That’s fine if the recipient receives this inheritance on the first of a month. But receiving the inheritance on the 25th of a month means you’ll have a much shorter time frame to decide on how to spend down or otherwise deal with the funds.
If you’ve been notified that inheritance is imminent, start planning for it immediately to minimize the impact on Medicaid eligibility. Make an appointment with your estate planning attorney immediately to discuss the inheritance and the best ways to handle it.
Chicago IL Living Trust And Estate Planning Attorney
Medicaid planning is just one part of estate planning that you can benefit from. However, it is a very complex and complicated area of law and requires careful attention to detail.
James C. Provenza is an estate planning attorney in Illinois with years of experience helping clients take care of their affairs, and to make sure their wishes are carried out. Call our firm today at (847) 729-3939, or use our online contact form.
