When an at-home spouse predeceases a nursing home spouse, how does that affect Medicaid eligibility? What steps must be taken to preserve eligibility?

Under the Medicaid rules, the at-home spouse (or "Community Spouse" as he or she is referred to in the Medicaid laws) is entitled to exempt 50 percent (or 100 percent, in some states) of the total countable assets of both spouses, up to a maximum of $119,220. However, upon the Community Spouse's death, this exemption is no longer available, even if the nursing home spouse is still alive.

So, what happens to this leftover money?

Under the wills of most married couples, all assets pass to the surviving spouse. However, if the survivor is in a nursing home on Medicaid, such additional assets will immediately disqualify the survivor, since he or she is only permitted to retain a maximum of $2,000.

Why you can't just change your will

The question then becomes: Can the Community Spouse simply bypass the nursing home spouse by changing his or her will?

No, because under the laws of all states, a surviving spouse has a right to a minimum percentage of the assets of the deceased spouse. The calculations can be complicated, particularly if the couple has only been married for a short time, but in general the surviving spouse is entitled to between one-third and one-half of the assets that were titled in the name of the deceased spouse.

In some states it is possible to leave that one-third to one-half amount (known as a "statutory share" or "elective share") to the surviving spouse in a form of trust that will not be countable for Medicaid eligibility purposes, but in other states the money must pass into the name of the surviving spouse. Until that money is somehow disposed of, the surviving spouse will be disqualified from receiving Medicaid.

Medicaid planning for married couples

Once the surviving spouse receives their inheritance, it is a good idea to convert that money into a form that is not countable, such as a Medicaid-qualified annuity, household items or even a new car.

It is generally not a good idea to just gift the money to family members, since that will cause a Medicaid disqualification period. (Learn more about Medicaid's Lookback and Penalty Periods.)

Hopefully, prior to the community spouse's death, the couple changed the form of all accounts and real estate so they were no longer in joint names. Otherwise, there could be significant financial consequences.

For example, if the house was still in joint names upon the death of the Community Spouse, then it will pass automatically into the sole name of the nursing home spouse. Normally that would not cause disqualification of the nursing home spouse, so long as they (or a family member) can indicate that they have the "intent to return home," no matter how unlikely that is as a practical matter.

But what happens upon the surviving spouse's death?

If the home is in the sole name of the surviving spouse, then the state can make a claim against it for the full amount of benefits paid out ("recoupment" or "estate recovery"). This is another reason why having the house in the sole name of the Community Spouse is much preferred. Once that is done, the Community Spouse could then put the house in a trust for the other spouse, or at least reduce the amount going to the surviving spouse, under the elective share rules discussed above.

What about income? This will rarely be an issue, since all of the nursing home patient's income will go to the nursing home in any event, without affecting eligibility.

As you can see, when a married couple decides to do Medicaid planning, it is not enough merely to get one spouse on Medicaid. Further planning—typically requiring a new will for the Community Spouse and re-titling of all assets—must be done for the Community Spouse to cover the possibility that the Community Spouse will be the first to die.