When they run out of money — the Medicaid transition

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.

You've been managing your parent's finances carefully. You've planned, you've saved, you've made smart choices about care. And then you look at the numbers and realize something uncomfortable: your parent has enough money to fund care for the next three years, maybe four if you're lucky. After that, the money runs out. Your parent is eighty-five. Your parent might need care for another ten or fifteen years. What happens then?

This is when Medicaid becomes not just a safety net but actually the plan. And if your parent hasn't thought about this, the transition can become chaotic and expensive very quickly.

Medicaid is a federal program administered by states, which means the rules are different in every state. Medicaid pays for healthcare for people with limited income and assets. For elders, Medicaid also pays for long-term care, which is the part that matters most for your conversation right now. Most private long-term care insurance doesn't cover the full cost of care. Medicare doesn't cover long-term care. Medicaid is often the only payer for extended care when private resources run out.

The problem is that Medicaid has rules. Strict rules. Rules about how much money you can have. Rules about what happens if you've given away money in the past few years. Rules that vary dramatically by state. Rules that, if you don't understand them and plan accordingly, will cost your parent tens of thousands of dollars and might leave your parent with no way to pay for care.

Understanding these rules now, before your parent's money runs out, means the difference between your parent being able to access care through Medicaid and your parent being stuck without resources and without coverage.

Understanding the Rules

Start with the asset limit. To qualify for Medicaid in most states, your parent cannot have more than a certain amount of money or assets. The limit is usually between $2,000 and $3,000, depending on your state. If your parent has more than that, your parent is not eligible for Medicaid, and your parent needs to spend down their money to care costs before Medicaid will cover anything.

This seems simple until you realize what it means. If your parent has $200,000 in savings and needs long-term care costing $8,000 per month, your parent will spend down that $200,000 fairly quickly, and then Medicaid will take over. The problem is the time between when your parent's money runs out and when Medicaid kicks in. If your parent spent money unwisely or made transfers that Medicaid considers problematic, Medicaid might refuse to cover your parent for a period of time, leaving your parent and your family paying out of pocket.

The income limit is also important. Medicaid limits monthly income, though the limits are usually higher than the asset limits and most people who qualify for Medicaid based on assets also qualify based on income. Income includes Social Security, pensions, annuity payments, and other regular sources of money. Income does not typically include one-time asset sales or loans from family members, though this varies by state.

Now here's the part that makes things complicated: the look-back period. Medicaid examines your parent's financial transactions for a period of time in the past, usually five years. Medicaid is looking for gifts or transfers. If your parent gave away money in the five-year look-back period, Medicaid will penalize your parent by refusing to pay for care for a certain number of months.

This creates a perverse situation. Your parent might think, "I have too many assets to qualify for Medicaid. I should give some money to my children." Sounds reasonable. But if your parent gives away $100,000 to children, Medicaid will penalize your parent. Medicaid will calculate how much care that $100,000 could have paid for and will refuse to cover your parent for that length of time. Your parent wanted to protect assets for the family, but instead ended up creating a gap in care coverage.

There are some transfers that don't trigger penalties. Money transferred to a spouse is usually exempt. Money transferred to disabled or blind children might be exempt. Money used to pay legitimate debts is usually okay. But gifts to other children or adult children who are not disabled are generally not exempt from penalties.

Different states also have different rules about what assets are exempt and what assets count toward the limit. The primary residence is almost always exempt, which means your parent can own a home of any value and still qualify for Medicaid. But other real estate might count. Life insurance might count, depending on the face value. Retirement accounts might count. Some states are more generous in what they exclude. Some states are stricter. You need to understand your specific state's rules.

Eligibility and Planning

The first step is understanding whether your parent might eventually qualify for Medicaid. If your parent's current assets and income are low enough, the answer is yes. If your parent has significant assets, the answer is maybe, but only after spending down those assets to care. If your parent has very significant wealth, the answer might be no, and your parent might never qualify.

Once you understand that your parent might eventually need Medicaid, you can start positioning assets strategically. This is where an elder law attorney in your state becomes absolutely essential. The rules are complex and state-specific, and making a mistake can cost your parent thousands of dollars.

In general, strategies might involve moving money into a spouse's name if your parent is married and the spouse is not entering a care facility. Strategies might involve purchasing an annuity that converts liquid assets into a stream of income that won't count as available assets for Medicaid purposes, though this varies by state. Strategies might involve putting a home into a trust, though this depends on when the trust is created and how it's structured. Strategies might involve paying off debt that uses up assets in a way that Medicaid recognizes as legitimate. Strategies might involve purchasing long-term care insurance to increase the amount of private resources available before Medicaid is needed.

What you absolutely cannot do is transfer assets to your parent to help them qualify for Medicaid, because Medicaid will look at those transfers too and might impose penalties on your parent for receiving gifts. You cannot hide assets or structure transfers to evade the look-back period rules, because Medicaid has sophisticated methods for finding hidden transfers and will penalize your parent accordingly. You cannot simply give away your parent's money to avoid Medicaid rules, because the penalties will be worse than just letting Medicaid pay for care.

What you can do is work with professionals who understand the rules in your state to structure your parent's affairs strategically and legally. This costs money upfront, but it usually saves much more money than it costs.

The Application Process

Before your parent applies for Medicaid, gather the documentation. Medicaid is going to ask for proof of identity, proof of income, proof of assets, and proof of expenses. Start collecting now, before you need to apply.

You'll need birth certificate or passport. You'll need Social Security documentation. You'll need bank statements, investment statements, and proof of property ownership. You'll need documentation of income, whether that's Social Security statements, pension statements, or annuity statements. You'll need proof of medical expenses, documentation of current care arrangements, and confirmation of what your parent is currently paying for care.

Also understand what triggers a Medicaid application in your state. Some states allow people to apply for Medicaid while they're still paying privately for care, and Medicaid will cover care going forward. Some states require that your parent apply within a certain timeframe of institutionalization. Some states have waiting periods. Some states allow you to apply before your parent enters a facility. Understanding this timeline is important because applying at the wrong time might delay approval or cause coverage gaps.

When you're ready to apply, contact your state's Medicaid office or the facility where your parent is receiving care. Most long-term care facilities have someone who handles Medicaid applications and can walk you through the process. But you're responsible for gathering documentation and providing accurate information.

The application process is tedious. You'll fill out forms, provide documentation, answer questions about assets and income, and wait. Processing times vary by state, but can take anywhere from a few weeks to several months. During that time, your parent continues to pay for care out of pocket unless the state allows you to receive benefits before the application is formally approved.

After Approval: Managing Ongoing Requirements

Once your parent qualifies for Medicaid, your parent's care is covered, but there are obligations. Your parent cannot simply stop reporting to Medicaid or hide changes in circumstances.

If your parent's income changes, you need to report it. If your parent receives a gift or inheritance, you need to report it, because it might affect your parent's Medicaid eligibility. If your parent's living situation changes, if your parent's facility changes, or if your parent's health status changes, these need to be reported.

Your parent will need to recertify periodically, which means providing updated information to prove that your parent still qualifies. This typically happens annually but varies by state. You'll be asked to provide current proof of income, proof of assets, and documentation of where your parent is living and receiving care.

Also understand what happens to your parent's assets. If your parent owns a home and is receiving Medicaid for long-term care, your parent can keep the home, but there might be a lien against it. When your parent eventually passes away, Medicaid can try to recover costs from the estate, including by claiming against the home. There are some protections if your parent is married and the spouse is still living in the home, but the general principle is that Medicaid can try to recover money from your parent's estate.

This is where good planning from the beginning becomes valuable. If your parent transferred the home to a trust or to children in a way that protects it from Medicaid recovery, your parent's heirs might be able to keep the home. If your parent never did any planning, the home might go to Medicaid recovery. This is not always avoidable, but some strategies can help.

Planning Ahead

The Medicaid transition is easiest when it's planned. It's hardest when your parent is already in a care facility and running out of money, and you're scrambling to understand eligibility and get an application submitted while your parent's care bills keep mounting.

The time to understand these rules is now, while your parent is healthy and you have time to strategize. The time to consult with an elder law attorney is before your parent's money is running out. The time to structure your parent's assets is before you're in crisis mode.

This doesn't mean your parent needs to apply for Medicaid immediately. It means understanding how much time your parent has, what the rules are in your state, and what planning makes sense for your parent's situation. It means documenting everything so that when the time comes, you're not scrambling to find five years of bank statements.

For most families dealing with aging parents, Medicaid is eventually part of the picture. Understanding it now, understanding how to qualify without harming your parent, and understanding how to manage ongoing requirements will make the process much simpler when the time comes.

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.