The asset protection conversation — what's legal and what's risky
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.
Understanding the Basics
Your parent is worried. They've heard stories about people losing their houses to pay for nursing home care, and they want to know what they can do to protect their assets. At the same time, they worry about doing something illegal or unethical. This concern is understandable because the line between smart planning and fraud can seem blurry, especially when you're reading advice from different sources or talking to different professionals.
The honest truth is this: there are legal ways to protect assets that exist within the Medicaid rules, and there are illegal ways to hide assets that constitute fraud. The difference matters, both for your parent's sake and for your family. If your parent hides assets illegally, they face criminal penalties. They might also face civil penalties from the state, and their assets might be seized anyway. Your parent needs to know what's legal and what's not before doing anything.
The concept of asset protection in the elder care context mostly revolves around Medicaid. Medicaid is designed to help people who have spent down their resources and can't pay for care themselves. But Medicaid has rules about what you own and how much you can own. If your parent has too many assets, they have to spend those assets before Medicaid will pay for their care. Asset protection strategies are designed to reduce what Medicaid considers countable assets, without crossing into illegal territory.
The fundamental rule is this: anything your parent owns is a countable asset for Medicaid purposes, with some exceptions. Your parent's house is usually exempt if they live in it. A car is usually exempt. Some retirement accounts are exempt. But savings accounts, investment accounts, and many other assets are countable, and they have to be spent before Medicaid kicks in. If your parent wants to keep those assets from being spent on care, they need to do something with them before they apply for Medicaid—and that something has to be legal.
One legal strategy is the irrevocable trust. If your parent puts assets into an irrevocable trust, those assets are no longer owned by your parent in the way that Medicaid counts. Instead, they're owned by the trust, controlled by a trustee, and managed for beneficiaries. The magic of the irrevocable trust is that once it's in place and the assets are transferred, they're no longer your parent's assets for Medicaid purposes. But—and this is essential,the transfer has to happen more than five years before your parent applies for Medicaid. This is the look-back period. If your parent moves money into a trust less than five years before applying for Medicaid, Medicaid counts it as a transfer and penalizes your parent with a period of ineligibility.
Another legal strategy is gifting. Your parent can give money to their children or other people with no strings attached. Once the money is given, it's not your parent's anymore, and Medicaid can't count it. But again, timing matters. If your parent gives money away less than five years before applying for Medicaid, Medicaid treats it as a transfer. The five-year look-back period is the critical timeline in all of this.
There are other legal strategies too. Some people buy annuities in specific ways that can reduce countable assets. Some people restructure their income and assets to take advantage of Medicaid rules. Some people set up trusts with specific language that protects certain assets. These strategies are complex and vary by state, which is why talking to an elder law attorney makes sense if your parent has significant assets.
What's Legal and What's Not
The line between legal planning and illegal fraud isn't always clear in families' minds, so let's be specific about what crosses it. Transferring assets to a family member and letting them keep the money is legal. The Medicaid agency doesn't care if you give money to your children. They'll impose a penalty period, but it's not illegal. What would be illegal is transferring assets with a secret agreement that the family member will give the money back. That's fraud. You're essentially hiding assets while pretending to give them away.
Similarly, putting assets into a trust is legal. But putting assets into a trust while keeping secret control of them, or with a secret understanding that you can access the money whenever you want, crosses into fraud territory. The whole point of the irrevocable trust is that you actually give up control. If you're trying to have it both ways,protection from Medicaid plus continued access to the money,you're committing fraud.
Paying for care out of your own pocket before applying for Medicaid is legal and smart. If you pay the nursing home directly, that's a legitimate expense that reduces your assets. But if you pay for fake services or pad bills to hide where the money went, that's fraud.
The timing issue is important. The five-year look-back period is a Medicaid rule, not a law against transfers. You can transfer assets to anyone at any time. If you transfer assets more than five years before applying for Medicaid, Medicaid doesn't care and doesn't penalize you. If you transfer assets less than five years before applying, Medicaid penalizes you. But it's not illegal to transfer assets. It's legal planning, and the penalty is the price of planning less effectively.
What crosses the line into actual fraud is intentional deception. If you hide transfers from Medicaid, if you lie about where assets went, if you conceal assets in other people's names, if you falsify documents,that's fraud. It's not just against Medicaid rules. It's a crime. And it's not worth it because Medicaid has investigators who look for fraud, and penalties can include criminal prosecution, restitution, and being barred from Medicaid entirely.
Legal Strategies That Actually Work
The irrevocable trust strategy works because it actually transfers control of assets away from your parent. Your parent puts money into the trust, signs over the assets, and then a trustee,either a professional or a trusted family member,controls those assets. Your parent can't access the money without asking the trustee, and asking doesn't help because the trustee's job is to manage the assets for the beneficiaries, not for your parent. This is uncomfortable for some people because they're giving up control, but that's the point. Once your parent has given up control, Medicaid can't require that those assets be spent on care because your parent doesn't own them anymore.
The gifting strategy works by reducing the pool of countable assets. Your parent gives money to their children now, while they're capable of giving it. The children keep the money and use it however they want. Your parent's assets are reduced, and if your parent needs Medicaid more than five years later, the gifts don't count against them. The challenge with this strategy is that it requires your parent to trust their children with the money, and it requires actually relinquishing the funds rather than keeping them "for safekeeping." Some parents aren't comfortable with this. Others are fine with it as long as they know the money will eventually come back to pay for their care.
Some people use strategies involving selling their house. In some states and in some situations, you can sell your house to one of your children at less than fair market value, then buy it back through a deed that lets you live there for the rest of your life. The idea is that the value of your interest in the house is reduced from Medicaid's perspective. The specifics are complicated and vary by state, and this strategy can backfire if not done correctly. It requires careful coordination with an attorney and sometimes with a tax professional.
Annuity strategies involve using your parent's money to buy an annuity that provides income rather than leaving the money as a lump sum. Under certain conditions, the cash value of the annuity might not count as an asset for Medicaid purposes, but only the income is counted. This is complex, and not all annuities work. You need an attorney who understands Medicaid rules to make sure any annuity you buy will actually help.
Some states allow something called a Medicaid-compliant IRA, which is a special kind of retirement account that can reduce countable assets. Other states have different rules about what counts and what doesn't. State rules vary dramatically, which is why location matters and why an attorney in your state is valuable.
Having the Conversation with Your Parent
Before your parent does anything with assets, they need to have an honest conversation about what they want to protect and why. Do they want to preserve their house? Do they want to leave money to their children? Do they want to make sure they have money available for care they might need? These goals might conflict, and your parent needs to prioritize them.
Your parent also needs to understand the costs and tradeoffs. If they gift money to children to protect it from Medicaid, they're giving up control and access to that money. If they put money in a trust, they're giving up some control but getting protection. If they do nothing, their assets might get spent on care. Different strategies have different costs and different results. Your parent needs to decide what they're willing to accept.
Your parent needs to know that timing matters. If they want to do something, they need to do it while they still have capacity and while the five-year look-back period will be in their favor. If they wait until they're diagnosed with dementia or until they've had a stroke, planning options become much more limited. The time to have this conversation is when your parent still wants to, not when you're trying to convince them to do it.
Your parent should also know that having a plan doesn't mean they'll definitely need Medicaid. Many people put together an asset protection plan and never end up needing Medicaid. The plan is insurance, essentially. It's like buying home insurance,you hope you never need it, but you have it in case something happens.
An elder law attorney can help guide this conversation. They can explain options to your parent in a neutral way, without judgment. They can explain the different strategies and let your parent decide which approach makes sense. They're not trying to convince your parent to do anything; they're explaining possibilities. That neutrality can be valuable when these conversations involve family dynamics or different family members wanting different things.
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 asset protection or long-term care planning, consult with an elder law attorney or contact your local Area Agency on Aging for guidance and support.