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If I receive life insurance money as an inheritance, can I sell my car privately to buy a new one, or do I have to sell to the dealer I'm buying the new one from?

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Trading the car in and towards your new car would be the simplest. May not be the best $$ wise but easier paperwork.

If you sell old car, it will need to be sold at its current Blue Book value. If not, it could be viewed as gifting by Medicaid with a transfer penalty (set by days).

You mention doing a spend down, so you are getting ready for applying for Medicaid, right? If its that you are going into a NH in the near future, just what need is there for a car? Once you are in the NH on Medicaid, who is going to pay all the costs on the car (taxes, insurance, gas, etc)? And pay on all this from day 1 of Medicaid till forever? Your medicaid required co pay to the NH will leave you with no - nada- zilch to pay on the car. So just who will pay on a car they don't own?and pay till your death and beyond into probate?

Some states limit the value of the car for Medicaid too. Buying a 40k car right before applying for Medicaid will probably be viewed as done for avoidance and application ineligible unless there is a community spouse.
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dbisson--Are you asking these questions on behalf of yourself or someone else, such as a parent?
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We recently had to sell Dad's car, while in process of finding him a long term care facility. Knowing we will certainly need to apply for Medicaid long before the 5 year look back would be over, the elder law attorney told us we were required to get at least two appraisals of the car's value and they had to come from a car dealership. If the appraisals were hugely different, we were to get a third appraisal, and we were required to sell for no less than ten % less than the higher appraisal amount (no matter who we sold to, whether that be a dealership or a private person.) So you can sell privately, but you have to get fair value for the car.
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Gayle, your details on this, most interesting & informative!

For house value in dealing with MERP, I was told that if the appraisal (done by licensed appraiser & NOT the figure a Realtor does for the comps book) is less than the last tax assessor value by more than 10% for both land and improvements, then a second appraisal is required. Both available for presentation for probate with license # of appraiser on document. I think its interesting that you in Ohio & me in TX are finding Medicaid is now increasing documentation requirements to get appraisal done by a professional to be used as a benchmark for real property. By requirements like this, it's going to make more hoops for families to go through to get their parent eligible or deal with MERP later on. Lots of folks aren't going to consult with legal and they are going to find their elder is ineligible with no way around it as car/house already sold.
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This is interesting. My problem is Moms house is appraised at 150,000 for tax purposes. She has about 7 acres most wet lands. The house os 125 years old. Needs thousands of dollars to get it to sell for this. Neither my Mom nor I have the money to this. So, I'm planning on selling as is and get what I can. Its just eating up what she has in SS and she is living with me. I am hoping to get enough to put her in an assisted living that requires 2years of money before Medicaid will take over. Her car was over 20yrs old so we sold that 2 yrs ago for five hundred.
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Not quite sure what the life insurance proceeds have to do with buying a car, and your application for Medicaid. As someone else asked are you yourself in need of welfare, or are you assisting someone else?
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