Receiving a one-time inheritance can be both a financial blessing and a legal challenge, especially if you rely on Medicaid for healthcare coverage. Medicaid eligibility is based on strict income and asset limits, and an unexpected inheritance may put you over those limits, risking disqualification. Fortunately, with careful planning, you can protect your inheritance while maintaining your Medicaid benefits.
If you're concerned about how an inheritance may impact your Medicaid eligibility, contact us by either using the online form or calling us directly at 414-253-8500 for legal assistance.
How an Inheritance Affects Medicaid Eligibility
Medicaid is a needs-based program with strict income and asset limits. If you inherit money or property, it is typically considered a countable asset, which could push you over the eligibility threshold. The consequences may include:
- Losing Medicaid coverage until you spend down the inheritance to a qualifying level.
- A Medicaid penalty period if the funds are not handled properly.
- Recovery claims if Medicaid deems the inheritance subject to estate recovery after your passing.
Medicaid Spend-Down Rules
If your inheritance causes you to exceed Medicaid's asset limit, one option is a spend-down, where you legally reduce assets to requalify. However, simply giving away the money may trigger Medicaid's five-year look-back period, resulting in penalties. Instead, strategic spending on non-countable assets is a more effective approach.
Examples of allowable spend-down expenses include:
- Paying off debts, such as medical bills or credit card balances.
- Purchasing exempt assets, like a home (if within Medicaid's equity limits) or a vehicle.
- Making home modifications for accessibility (e.g., wheelchair ramps, stairlifts).
- Prepaying funeral and burial expenses through an irrevocable pre-need funeral contract.
While spending down can work in some cases, it is not always the best option. Depending on your circumstances, a Medicaid Asset Protection Trust (MAPT) or a Special Needs Trust (SNT) may be more effective.
Strategies to Protect an Inheritance While Keeping Medicaid
1. Disclaiming the Inheritance
If you do not need the inheritance or prefer to keep Medicaid benefits intact, you may choose to disclaim (refuse) the inheritance. By doing so, the assets pass to the next eligible beneficiary. However, disclaiming an inheritance must be done correctly to avoid Medicaid penalties.
- The disclaimer must be in writing and submitted within nine months of the benefactor's passing.
- You cannot direct where the inheritance goes-Medicaid may treat this as a gift, triggering a penalty period.
2. Transferring the Inheritance to a Special Needs Trust
For individuals who are disabled, a Special Needs Trust (SNT) can preserve an inheritance while maintaining Medicaid eligibility.
- First-Party SNT: If you are under age 65, you can place the inheritance into a first-party special needs trust, which is Medicaid-exempt. However, Medicaid may seek reimbursement from the trust after your passing.
- Third-Party SNT: If a loved one is planning your inheritance, they can set up a third-party SNT, which is not subject to Medicaid recovery.
3. Establishing a Medicaid Asset Protection Trust (MAPT)
A Medicaid Asset Protection Trust (MAPT) is an irrevocable trust designed to shield assets from Medicaid's countable resources. Unlike a standard revocable trust, assets in a MAPT are not considered yours for Medicaid eligibility purposes. However, MAPTs are subject to the five-year look-back rule, so this must be planned in advance.
4. Using a Pooled Trust for Seniors Over 65
If you are over 65 and inherit money, a pooled trust can help preserve the inheritance while keeping Medicaid. This type of trust is managed by a nonprofit organization and allows you to use the funds for your needs, such as:
- Medical expenses
- Home care services
- Assistive technology
Medicaid does require that any remaining funds in the pooled trust be used for repayment upon your passing.
5. Converting the Inheritance into a Non-Countable Asset
Instead of leaving the inheritance in a form that Medicaid considers countable, you may be able to convert it into an exempt asset. Some common strategies include:
- Purchasing a primary residence (if within Medicaid's home equity limits).
- Buying an annuity that complies with Medicaid rules.
- Investing in a vehicle that Medicaid considers an exempt asset.
By converting the funds into a non-countable asset, you can preserve the value of the inheritance while maintaining Medicaid benefits. However, these transactions must be structured properly to avoid penalties.
6. Gifting the Inheritance and Medicaid's Look-Back Period
Many people consider gifting their inheritance to family members to quickly reduce their assets below Medicaid's limits. However, Medicaid enforces a five-year look-back period on asset transfers. If you give away money or property within five years of applying for Medicaid, you could face a penalty period, during which you are ineligible for benefits.
In some cases, partial gifting with a promissory note may allow you to transfer assets while minimizing the penalty period. This is a complex strategy that requires careful legal guidance to ensure compliance with Medicaid rules.
Steps to Take When You Receive an Inheritance
If you are on Medicaid and anticipate receiving an inheritance, it is crucial to act quickly and strategically to protect your benefits. Here's what you should do:
1. Consult an Attorney Immediately
Medicaid laws are complex and vary by state. A knowledgeable estate planning attorney can help you explore your options and implement a strategy to protect your inheritance while maintaining eligibility.
2. Avoid Immediate Deposits into Your Account
Depositing an inheritance check directly into your personal bank account may immediately push you over Medicaid's asset limits. Instead, work with an attorney to determine the best way to handle the funds before taking any action.
3. Consider a Legal Trust or Exempt Asset Conversion
Based on your situation, you may need to establish a Medicaid Asset Protection Trust, Special Needs Trust, or Pooled Trust, or convert the funds into non-countable assets such as a home or annuity.
4. Follow Proper Spend-Down Guidelines
If spending down the inheritance is the best option, ensure that expenditures comply with Medicaid rules to avoid penalties. Acceptable spend-down expenses include medical bills, home improvements, debt repayment, and funeral arrangements.
5. Notify Medicaid Properly
Failing to report an inheritance could result in legal consequences, including Medicaid fraud charges. Work with your attorney to properly notify Medicaid and document how the inheritance was handled.
Protect Your Medicaid Benefits While Preserving Your Inheritance
A one-time inheritance doesn't have to result in Medicaid disqualification, but careful planning is essential. Whether through legal trusts, spend-down strategies, or exempt asset conversions, there are multiple ways to protect your inheritance while maintaining your healthcare coverage.
At Heritage Law Office, we help individuals and families navigate Medicaid planning and asset protection. If you're facing an inheritance and need guidance on preserving your benefits, contact us today.
📞 Call us at 414-253-8500 or use our online form to schedule a consultation.
Frequently Asked Questions (FAQs)
1. How does Medicaid treat an inheritance?
Medicaid considers an inheritance as countable income or assets, which could push you over the eligibility limit. If this happens, you may lose benefits until you spend down the excess funds or take legal steps to protect them.
2. Can I refuse an inheritance to stay on Medicaid?
Yes, you can disclaim an inheritance, but it must be done correctly to avoid Medicaid penalties. The disclaimer must be in writing, irrevocable, and submitted within nine months of the benefactor's passing. However, Medicaid may still consider the inheritance as an available resource if not handled properly.
3. What happens if I deposit my inheritance into my bank account while on Medicaid?
If you deposit the inheritance into your bank account, it becomes a countable asset and could result in Medicaid disqualification. To avoid this, you should consult an attorney before taking any action, as legal strategies like trusts or exempt asset conversions may be better options.
4. Is a Special Needs Trust a good option for inheritance protection?
Yes, a Special Needs Trust (SNT) can protect an inheritance while preserving Medicaid benefits, particularly for individuals with disabilities. A first-party SNT is funded with the recipient's own assets and must include a Medicaid payback provision, while a third-party SNT is created by someone else and is not subject to Medicaid recovery.
5. What is the Medicaid look-back period, and how does it affect inheritance planning?
Medicaid has a five-year look-back period, meaning any assets gifted or transferred within five years of applying for Medicaid can result in a penalty period of ineligibility. If you receive an inheritance, improper gifting could trigger a penalty, so it's essential to explore other strategies such as trusts or spend-down options.