Estate planning and Medicaid — how they interact
This article is for educational purposes only and does not constitute medical, legal, or financial advice. Every family situation is different, and you should consult with appropriate professionals about your specific circumstances.
There's a reason people talk about Medicaid planning in the same breath as estate planning. They're not the same thing, but they affect each other in ways that matter a lot. Your parent's estate plan determines what happens to your parent's money after your parent dies. Medicaid determines what happens to your parent's money while your parent is alive and needs long-term care. If your parent is facing expensive care, the two have to work together, or one of them will undermine the other.
Here's the basic problem. Your parent might have a modest amount of money saved up. Your parent might have a house. Your parent might have retirement income. That all seems reasonable for retirement. But if your parent needs long-term care at home or in a facility, the costs are stunning. Nursing home care can cost ten or twenty thousand dollars a month. In-home care can cost nearly as much. Those costs add up fast. A year of nursing home care can cost a quarter million dollars. Two years can wipe out a lifetime of savings.
Medicaid can pay for long-term care when the person needing care has limited assets. But Medicaid has rules. The rules are designed to prevent people from hiding assets so the government has to pay for care that the person could afford. So Medicaid looks at assets. It looks at transfers. It looks at what happened to the money. If your parent gave away assets to get down to the Medicaid limit, Medicaid might penalize your parent, or might refuse to pay.
This is where estate planning comes in. If your parent's estate plan says the house has to go to the children after your parent dies, but your parent gives the house away to avoid Medicaid, the estate plan doesn't matter anymore. If your parent's estate plan sets up a trust to protect assets, but the Medicaid rules don't recognize that trust as a real protection, the estate plan isn't doing what your parent intended.
The two documents have to be built to work together. Otherwise, one of them becomes worthless, or your parent ends up worse off. Your parent might want to provide for your parent's children in the will, but if all the assets end up going to pay for care, there's nothing left to provide. Or your parent might be eligible for Medicaid but doesn't qualify because assets are in the wrong place in the estate plan.
This is complicated stuff, and it's worth getting help understanding it. But the basic principles are important to know. Because if your parent needs long-term care and your parent's estate plan and Medicaid strategy aren't aligned, things can go very wrong.
Understanding Your Parent's Specific Situation
The first question is whether long-term care is actually likely for your parent. Some people have a sudden illness and die quickly. Some people have a chronic illness that requires care for years. Some people have dementia that slowly progresses. Some people stay healthy until they die. Your parent's health situation and family history give you some clues about what might happen.
If your parent has already been diagnosed with a condition that will likely require care, the planning is more urgent. If your parent seems healthy now but has a family history of dementia or a condition that leads to care needs, the planning is still important but less urgent. If your parent's health situation is completely uncertain, the planning is still worth doing, because you're protecting against risk.
The second question is what resources your parent has. What's your parent's income? Social Security, pensions, part-time work, investments? What are your parent's assets? Savings, house, cars, investments, retirement accounts? What does your parent owe? Mortgage, credit cards, medical bills?
If your parent has significant assets, Medicaid might not be relevant unless your parent ends up needing very expensive, very long-term care. If your parent has modest assets, Medicaid might become relevant sooner. If your parent has very few assets, Medicaid might be the only way to pay for care.
The third question is what kind of care your parent might need. Home care, where someone comes in during the day? In-home care where someone stays 24/7? Adult day programs? Assisted living? Nursing home care? Each has different costs and different implications. Your parent might start with one level of care and move to another level as needs change.
The fourth question is what your parent wants to happen to assets if long-term care is needed. Does your parent want to spend down assets to qualify for Medicaid? Does your parent want to protect assets for the children? Does your parent want to be in a private-pay facility for as long as possible and then switch to Medicaid when the money runs out? Does your parent want to buy long-term care insurance?
These are practical questions with financial and emotional weight. Your parent might have very strong feelings about one approach or another. Your parent might not have thought about it at all. Either way, these questions shape what the estate plan and the Medicaid strategy should look like.
How Medicaid Rules Affect Estate Planning
Medicaid looks at your parent's assets in the month your parent applies for benefits. If your parent is over the asset limit, your parent is not eligible. The limit varies by state, but it's usually quite low, maybe three thousand dollars in countable assets.
Medicaid also looks back at transfers. If your parent gave away assets in the past, Medicaid might penalize your parent or refuse to pay for care for a certain period of time. The look-back period is usually five years. So if your parent gave away five hundred thousand dollars two years ago, Medicaid will see that gift and might refuse to pay for care.
There are some exceptions. Your parent can give away the house to a child and live there, and Medicaid might still pay for care. Your parent can transfer the house before needing Medicaid, and if enough time passes, Medicaid won't penalize your parent. These exceptions exist, but they have specific requirements, and they work differently in different states.
Medicaid also doesn't count certain assets. Your parent's primary home doesn't count, up to certain equity limits depending on the state. Your parent's car doesn't count. Your parent's personal effects don't count. Your parent's engagement ring doesn't count. These protected assets let your parent keep some things even while using Medicaid.
The point is that Medicaid has specific rules, and your parent's estate plan needs to respect those rules or work around them in a legal way. If your parent's estate plan creates a trust that Medicaid doesn't recognize as legitimate, the trust assets might be counted against Medicaid eligibility, defeating the purpose of the trust. If your parent's estate plan leaves the house to the children and your parent then sells the house to pay for care, the estate plan doesn't matter.
Some estate planning tools work better with Medicaid than others. A revocable living trust lets your parent control assets while alive but doesn't protect those assets from Medicaid. An irrevocable trust created more than five years before applying for Medicaid might protect assets from both Medicaid and creditors, but your parent loses control of the assets in the trust. A living will or healthcare directive doesn't directly affect Medicaid eligibility but can affect what kind of care your parent gets and how much it costs. Powers of attorney are essential for managing finances and healthcare if your parent becomes incapacitated.
Building a Strategy That Works
If long-term care is a possibility, your parent needs to talk to an elder law attorney who understands both estate planning and Medicaid. This is not a general estate planning attorney. This is someone who specializes in the specific rules in your parent's state.
The strategy depends on your parent's specific situation. If your parent has substantial assets and doesn't expect to need care for many years, the strategy might be simple. Your parent might just have a standard will and trust that transfers assets to the children when your parent dies. Medicaid might never be relevant.
If your parent has modest assets and is likely to need care within a few years, the strategy might be to use up assets to pay for care, and then apply for Medicaid when the assets are gone. This is called spend-down, and it's a legitimate strategy. Your parent pays for care out of pocket while the money lasts, and Medicaid pays when the money runs out. The estate plan just needs to make sure that designated assets are available to pay for care.
If your parent has some assets but not enough to pay for many years of care, the strategy might be more complicated. Your parent might set up an irrevocable trust more than five years before needing care, putting assets in the trust where they're protected from Medicaid. But this means your parent gives up control of the assets in the trust. It also means those assets don't go into your parent's estate and don't go through the will. This might be what your parent wants, or it might not be.
If your parent has a house with significant equity and expects to need care, the strategy might involve the house. Your parent might give the house to the children before needing care, and as long as your parent can still live there, Medicaid will still pay for care. Your parent might put the house in a trust that keeps the children's interest separate from your parent's interest, protecting it from Medicaid. Your parent might keep the house and plan to sell it later if care is needed. Each approach has different implications.
The strategy might also include long-term care insurance. If your parent is still healthy enough to qualify, buying insurance might be a good option. The insurance pays for care, protecting assets from Medicaid. This works well if your parent can afford the premiums and if your parent's health is good. If your parent is already showing signs of the condition that will require care, insurance might not be available.
Taking Action Now
Your parent doesn't have to wait until your parent is sick to do this planning. In fact, it's much better to do it before your parent is sick. Your parent can think clearly. Your parent doesn't feel rushed. Your parent has more options. Once your parent is in a nursing home and money is running out, your parent doesn't have five years to wait for an irrevocable trust to protect assets. Your parent has to work with what can be done right now.
So start by assessing the situation. Does your parent have substantial assets? Is long-term care a real possibility? Is your parent willing to talk about Medicaid planning? Once you know these things, you can decide whether this is urgent or whether it's something to discuss with your parent's attorney at the next regular estate plan review.
If planning seems necessary, find an elder law attorney in your parent's state. Call the state bar association. Call the local Area Agency on Aging. They can often refer you to attorneys who specialize in this work. At the first appointment, the attorney will ask detailed questions about your parent's health, your parent's assets, your parent's family situation, and your parent's wishes. Your parent should be prepared to answer these questions honestly.
Your parent should also bring financial documents. Bank statements, investment statements, mortgage information, insurance policies, deed to the house, information about pensions and retirement accounts. The attorney needs to understand the complete financial picture.
The documents that result from this planning might include a will, a trust, powers of attorney, and healthcare directives. They might include Medicaid-specific planning like an irrevocable trust or specific language protecting the house. The documents might include long-term care insurance or decisions about whether long-term care insurance makes sense.
Once the documents are in place, your parent should store them safely and tell the relevant people where they are. The power of attorney should know they're the power of attorney. The healthcare proxy should know they're the healthcare proxy. Your parent's children should know where to find the documents if needed.
Your parent should also keep the documents updated. If your parent's health changes, the documents might need to be updated. If your parent's financial situation changes, the documents might need to be updated. If your parent's state's Medicaid rules change, the documents might need to be reviewed.
The Intersection
Planning for both estate and Medicaid is complicated, but it's doable. The key is that your parent has to be intentional about what the documents do and how they fit together. A will that leaves everything to the children doesn't work if all the assets go to pay for care. An irrevocable trust that protects assets from Medicaid does work, but your parent loses control of the assets.
Your parent gets to decide what matters most. Does your parent want to protect an inheritance for the children, or does your parent want to make sure your parent's care is paid for? Sometimes these goals align. Sometimes they conflict. Your parent is the one who gets to decide what to prioritize, but your parent has to decide before the crisis comes. Once your parent is in a nursing home and the money is running out, the options get very limited.
The planning is worth doing because it lets your parent make that decision while your parent can think clearly. Your parent is not making a frantic choice in the middle of a crisis. Your parent is being intentional about what matters and how to protect it.
How To Help Your Elders is an educational resource. We do not provide medical, legal, or financial advice. The information in this article is general in nature and may not apply to your specific situation. If you are concerned about a loved one's cognitive health or safety, consult with their healthcare provider or contact your local Area Agency on Aging for guidance and support.