Imagine this scenario: Two decades ago, Kristin was driving home from a friend’s house when she was struck by a drunk driver, who hit her car head-on. After surviving a coma and suffering a brain injury that made it impossible to work, she’s been on Medicaid ever since.
While she has enough money to get by — she has no debt and owns her house — she doesn’t have much left over at the end of the month. That’s why, when she found out she had inherited $250,000 from her best friend, she was incredibly grateful. But also a little worried.
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A large lump sum of cash would bump Kristin over the income eligibility limit for Medicaid, so she could lose her benefits.
She’s now worried about Medicaid’s five-year Look-Back Rule, a period during which Medicaid can evaluate a recipient’s financial history to ensure they’re not artificially reducing their net worth. If so, a penalty period would apply.
Not only is Kristin worried about losing her Medicaid coverage, she’s also worried she might end up in violation of the Look-Back Rule and that a Medicaid lien would be placed on her property when she dies, so she wouldn’t be able to pass on her remaining assets to her children.
Are her concerns valid or are there ways to make the windfall work more in her favor?
Could an inheritance jeopardize Medicaid?
The Affordable Care Act determines income eligibility for Medicaid based on Modified Adjusted Gross Income (MAGI). To receive Medicaid, you can’t exceed monthly income and asset limits, which differ by state. In most cases, a single senior applicant can’t exceed $2,901 a month in income, according to the American Council on Aging (ACOA).
“In 2025, most states have an asset limit of $2,000 for an individual senior applicant and $3,000 for an elderly couple,” the ACOA writes. Some assets are exempt, such as the applicant’s house, vehicle and personal belongings. Each state sets its own rules around how IRAs, 401(k)s and pensions are accounted for, too.
An inheritance would count as income in the month it’s received; in Kristin’s case, it would push her way over the income limit for Medicaid benefits.
The first thing Kristin should do is report the inheritance to her state Medicaid agency.
“Medicaid will view the inheritance either as income and/or assets, depending on when the inheritance was received and how long it has been since receipt,” the ACOA writes.
But she should do it as soon as possible.
“While a Medicaid beneficiary generally has 10 calendar days to report the receipt of an inheritance, this timeframe could be shorter or longer, depending on the state,” the ACOA says.
If you don’t, and the inheritance disqualifies you from Medicaid, then you’d be responsible for reimbursing Medicaid for any benefits you received during that time.
Each state has different rules, which can add to the confusion. A Medi-Cal recipient in California, for example, is allowed to gift an inheritance to a third party, so long as it’s done in the same month it’s received. The state also has no Look-Back Rule in place for assets transferred after Jan. 1, 2024.
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Strategies that could help
It’s possible to “spend down” your inheritance, too — so long as it doesn’t violate the Look-Back Rule.
“If the money is spent in its entirety during the month of receipt and without violating Medicaid’s Look-Back Rule, one will be eligible for Medicaid again the following month,” according to the ACOA.
That might mean paying off debt, paying for long-term care, making home modifications or renovations for accessibility purposes or buying assets that are exempt from the asset limit, such as clothing or home appliances. You could even pre-pay funeral expenses through an Irrevocable Funeral Trust.
There are also strategies that may allow someone to benefit from an inheritance without losing Medicaid. These include:
Pooled Special Needs Trusts (SNTs): To get around the Look-Back Rule, Kristin could transfer the inheritance into a Pooled Special Needs Trust (SNT), which is typically run by a charitable or philanthropic organization (there are several hundred to choose from in the U.S.). These transfers are exempt from the Look-Back Rule since they no longer count toward the recipient’s income or assets, according to the Brain Injury Association of America, but ensures they still have resources for long-term care.
Medicaid-Compliant Annuities (MCAs): Buying an MCA means you give an insurance company a lump sum of cash, which is then converted into a steady income stream. When properly structured, it allows you to lower your countable assets so you don’t lose Medicaid benefits — but not all states treat annuities the same way.
Medicaid Asset Protection Trusts (MAPTs): Sometimes called a Medicaid Planning Trust or Medicaid Trust, a MAPT protects a Medicaid recipient by putting their excess assets into a trust. The recipient names a trustee and beneficiary who will inherit those assets. Since the recipient who created the trust no longer owns those assets, it won’t count toward Medicaid’s asset limit.
A MAPT can also be used to protect assets for a recipient’s children or other family members. For example, it can help to protect assets from Medicaid’s Estate Recovery, where the agency tries to reimburse the cost of the recipient’s care from their estate after they pass away.
Before Kristin makes a decision, she may want to consult with an attorney. It’s worth looking for an attorney who is a member of the National Elder Law Foundation or the National Academy of Elder Law Attorneys and is familiar with the challenges that older adults can face.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
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