In order to qualify for Medicaid to cover long-term care in a nursing home, an individual elder is not allowed to own more than $2,000 in countable assets.

So what can a senior do if they have quite a bit of money and are facing long-term care in the not-too-distant future?

If they simply give the money away (to children, a charity, etc.), and they need to apply for Medicaid within five years of the date of the gift, Medicaid will disqualify them for some period of time. The larger the gift, the longer this penalty period will be. Exact calculations vary from state to state and it's important for caregivers and seniors to understand the difference between Medicaid's lookback and penalty periods.

Certain assets are exempt from Medicaid qualification calculations and thus do not factor in to the $2,000 limit or the gifting restrictions. If a senior invests their money in an asset that is exempt, then it is not considered a gift (since they continue to own the asset) and there will be no penalty period to worry about. These non-countable assets include such items as personal effects (furniture, jewelry, clothing), the elder's primary residence (as long as the residence is in the same state where the elder applies for Medicaid coverage), a single motor vehicle and prepaid funeral arrangements.

The impact of home ownership on Medicaid

If an elder has a good chunk of money and is currently renting, they might consider purchasing a home to shelter a large amount of otherwise-countable cash.

However, if the senior eventually does qualify for Medicaid, then the state will make a recoupment claim against their house after they die, in order to be repaid whatever money was spent on the elder's care under the Medicaid program. The house will probably have to be sold to repay the state, which is why this is often not an ideal solution.

And living on their own may no longer be a good option as an elder ages and begins to require more assistance. A better solution may be to move in with an adult child who owns their own home and purchase a "life estate" in their house.

A "life estate" means that the parent becomes a partial owner of their child's house—meaning that the parent cannot be evicted for any reason—and, after they die, the house automatically passes to the child. In most states, this will prevent the state from enforcing its recoupment claim for Medicaid payments.

Calculating a "life estate" amount

To calculate the amount of money an elderly parent should pay their adult child, they'll need to first look up the parent's age on the Life Estate and Remainder Interest Table published by the federal government. The number on this chart that corresponds with the elder's age will tell them how much to multiply the value of their child's house by in order to purchase a life estate.

For example, if you were age 80, then the value of your life estate would be 43.659 percent. Say the current value of your child's house is $300,000, you would pay him or her $300,000 x 43.659 percent, or $130,977. If you paid the child more than that, then you would be making a gift that would be subject to the penalties discussed above. If you paid less, then your child would be making a gift to you, which has no effect on your Medicaid eligibility, but could impact their federal income taxes.

Other housing options to protect assets

If the house lacks sufficient space, it is also possible for the child to protect excess assets by using them to add extra living space to their own home for the purposes of accommodating an elderly parent. The additions are often referred to as "mother-in-law" apartments.

Even if a senior owns their own home, they might consider selling it and rolling over the money into a life estate purchase in a child's house. Doing so may shelter that money from the state's recoupment claim. The one important caveat is that, in order to avoid having the entire purchase price being counted as a gift for Medicaid purposes, the parent must move into the house and live there for at least 12 months before entering a nursing home.

As you can see, this topic can get quite complex, so it is vital that you and your family seek the assistance of an attorney who is familiar with Medicaid rules, as well as real estate law.