Medicaid vs. Inheritance

18 Comments

Aunt Mildred just passed away and left your Uncle Bob $50,000 in her will. This would normally be a wonderful gift, but Bob is in a nursing home where his bill is paid by Medicaid. So what happens now?

First of all, we are talking about a “bequest” (i.e., gift under a will). “Inheritance” technically refers to the money or other asset(s) a beneficiary receives when a person dies without a will. So when the will is probated and the bequest is found in the will, it means nothing to Uncle Bob until he actually gets a check from the estate. After all, Aunt Mildred may have died with a lot of outstanding debt, and by the time the estate is settled, Bob’s bequest may have to be reduced or even eliminated. So for Medicaid purposes, it doesn’t count until he actually has access to the money, i.e., the cash in hand.

But let us assume that a year later the check comes in. Now what? Well, if Bob is still in the nursing home on Medicaid, he is legally obligated to report the receipt of the money to the state Medicaid department. The money counts as income during the month of receipt, but in the next month it counts as an asset. This will cause Bob to be disqualified for Medicaid due his having more than $2,000 of cash or other countable assets. So what can he do now?

Bob could have “disclaimed” the money within nine months of Mildred’s death so that it passes to the next person (or persons) in line under the will. Unfortunately, Medicaid simply ignores disclaimers and still treats Bob as if he got the money and then gifted it to the alternate recipient(s) named in the will. That will cause a 10-month penalty period. (The length of this penalty period can be longer or shorter, depending on the Medicaid recipient’s state of residence.) So for 10 months, Bob is disqualified for Medicaid. This is not a very good result, since he gave away the very money he now needs to pay the nursing home!

Bob could simply accept the money, pay the nursing home privately until the money is gone and then re-apply for Medicaid. That is fine, except that he really winds up getting no benefit from the bequest at all.

Instead, Bob could use the money to pay for a new television in his room, new furniture, new clothes, even a new car (if it will be used by another family member to drive him to doctor’s appointments, etc.). If he still owns a house, he could use the money to fix it up since it is exempt anyway.

He could also make a gift of approximately half the money and use the other half to purchase a short-term “Medicaid annuity.” That way at least he gets to benefit from half the money. But if he does not own a home and outlives the annuity, this really won’t do him any good.

Unfortunately, the best solution is one that it is now too late to take advantage of. Mildred should have left the money IN A TRUST for Bob’s benefit, which included language stating it could only be used to supplement—and not replace—any otherwise available government benefits. Such a trust can hold any amount of money, and Medicaid will not count it as Bob’s asset. Then the trustee can pay for extra medical treatment not covered by Medicaid such as eyeglasses, experimental treatments, massages, even vacations for family members to visit Bob.

Finally, if a person dies without a will (known as “intestate”) and the beneficiary is on Medicaid, the beneficiary will have no choice but to accept the money and then use one or more of the planning options discussed above to maximize the benefit of the inheritance.

A monetary gift left to a loved one with the best of intentions can actually end up hurting the beneficiary if it is done incorrectly. This is yet another example of how important it is to engage in careful financial and legal planning early on and to continue examining and updating your documents as necessary.

K. Gabriel Heiser is an attorney with over 25 years of experience in elder law and estate planning. He is the author of "How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets," an annually updated practical guide for the layperson.

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18 Comments

I disagree with the commenter who said Attorney Heiser's recommendations constitute abuse. With every 'system' there will be some abuse, but I believe in this case the law is very well thought out, and in place to protect / help/ serve the truly unfortunate. My 'firsthand knowledge' example is this - My sister has been handicapped since birth. She has cerebral palsy and other serious health issues. Last year she moved into an adult family home because her health had deteriorated to the point that she required round-the-clock care. Since she is in a motorized wheelchair she needs to live where hallways are wider than standard, and bathrooms have proper turnaround space. It also needs to be a home (or facility) with ramps instead of stairs. These are things most homes do not have. In other words, I, as her sister, didn't simply 'choose' not to take care of her - (referencing the commenter's statement of 'family members being unable or unwilling' - which comes across as judgmental, uninformed and inconsiderate). My sister is on Medicaid. She has no assets and in order to be eligible for Medicaid she can't have any assets. Medicaid gives her $60 mo. for personal use - i.e. everything she might possibly need outside of her care at the adult family home and medical care. The adult family home does NOT take her to appointments, I do. And I am happy to do so. Her mind is perfectly fine and she likes to be independent whenever she can. She is able to go places on a small private bus. This is not free and Medicaid doesn't pay for this. When our mom redid her will after dad died, the Elder attorney suggested that any bequest to my sister be put in a trust. This was recommended because any amount my sister would receive in excess of $2,000.00 would make her ineligible for Medicaid. That is a paperwork nightmare, especially with someone who has a lot of health issues. To the commenter - if you have never applied for Medicaid, or had to maneuver through their processes, you have no business commenting about it. I have, and I can tell you Medicaid for the disabled is very strict, they require a lot of back-up documentation. And rightly so. It needs to be there for the people who it was designed for. The trust monies my sister might get after mom dies will be held by the trustee (me) and given to her in bits and pieces to help with her needs (neither of us is going on a trip with those funds, or buying a car). It will pay for BASIC needs. The adult family home doesn't buy her clothes. They don't cut her hair. These must be paid for outside of Medicaid. Her medications are paid for through Medicaid, but over the counter items are not - things like aspirin, cold medicine, vitamins, lotion. My sister also goes to church every Sunday which costs her $3.50 on the private bus. Her $60 mo. breaks down to less than $14.00 a week. Subtract $3.50 and she has $10.50 a week. If she were to receive a few thousand dollars in a trust from mom that she could use for the rest of her life and that would be used to pay for the above mentioned items, (and maybe a birthday card to send a friend, or to go to a movie once in a while, or to pay for her own funeral when the time comes) - this hardly seems like something 'immoral'. I think there might be a few 'rich' people out there who might take advantage of the system but I think there are far, far more people like my sister. And that's why the law is written in the way it is.
Malsyc- Medicaid varies by state but for instance in ohio- you have to be completely unable to perform activities of daily living like - eating, dressing and toileting to qualify for in home service and not sure what that really covers. Check your state Medicaid agency for details. My parents aren't too able to do those well- but they recently didn't qualify- even tho they really barely can get their own selves fed healthy meals and are on the brink of an accident waiting to happen on their own- so we are trying to cover on our own and to pay visiting angels as much as able to help with supervision and feeding and cleaning and such. Medicare pays for some in home care for physical health issues such as rehab from a fall or edema issues- at a doctors prescription. Best thing for in-home funds is from Veterans Administration- if your mother is a veteran or was a wife of a veteran. Check aid and attendance benefit if so.

Also-
Great post earlier from beenthere- we may forget that Medicaid also covers seriously disabled people of all ages- but as described- there's still a lot of small things that add up quickly- not to mention the strain on the family caregivers.
Peace to that poster.
IMBabci2, I agree with you that our whole system of elder law should be restructured, and that is not a quickie project to make political points.

But people who are living within the current system are not "abusing" the system. The system may need changing, but to accuse people of abusing it when they are following the current rules is inappropriate.