Both parents are in a NH and I have spent down their assets and recently filed for Medicaid. The claim is currently pending.

I don't want to continue to pay the insurance premium so would prefer to sell the car. I am not after the proceeds - just want to get rid of the car.

Can I sell the car and deposit the funds into their checking account to be used for monthly expenses? Assuming the anser is yes can I do it now while the claim is pending or do I need to wait for the Medicaid claim to be accepted?

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The proceeds from the sale would be considered an asset. I would get the money done in a certified check so you can hold it till you determine where it goes best.

The state will know eventually about the sale as real property is recorded and ownership transfer will show up. So it is good you realize this already.

Depending on the amount of the proceeds from the sale and the amount of assets they have when they filed for Medicaid, the extra $ could or could not be an issue in having them declined for Medicaid or have a transfer penalty done.

They are allowed to have about 2K in assets and then whatever is the income ceiling for your state. This varies by state, so you need to find out exactly what the amount is. Like TX has 2K in assets but $ 2,094.00 in monthly income.
If the proceeds from the sale will take them over, then I'd suggest you spend the proceeds from the sale on something they can use and build up their assets almost to the ceiling allowed by Medicaid. If they do not have each a prepaid funeral & burial, then go and use the proceeds for that. Make sure the policies are NCV - no cash value. This is mucho importante for Medicaid. The FH will know how to do this as they do this all the time. NCV is your mantra!

FH will take certified check that you as DPOA sign over to them for the pre need

If they need new hearing aids, glasses or a good nice walkers - go an buy those. What Medicaid pays for on those is iffy or just basic & ugly. If they need any dental work done, that is a good place to spend-down as there is usually NO dental for the elderly from Medicaid.

i would ask the caseworker how best to deal with the proceeds from the car sale so that they do not face a transfer penalty from Medicaid on the sale of the car. But I would go an get an estimate on a preneed from the FH to be able to provide to the caseworker, so the caseworker can see what's what and say OK for this as a diversion for spend-down. By doing this you are providing a solution to what will be a future problem for Medicaid. Caseworker will like this.

Oh also there may be $ coming back from the time unused on the cancelled when you sell it insurance policy. So more $ there but that should be small. But the caseworker may ask about that too.

Remember to do whatever in your state is required to sell the car. Like to remove the license plates and file a change of registration with the state. Good luck.
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