How Can Mom Spend Down Without Losing Medicaid?

It’s a very thoughtful gesture to want to help your mother with her finances after your father’s passing, especially concerning her Medicaid eligibility. This situation involves complex rules around asset limits for government benefits, and it’s important to understand them thoroughly to avoid unintentionally jeopardizing her Medicaid coverage.

Understanding Medicaid Asset Limits

Medicaid is a “means-tested” program, meaning eligibility depends on an individual’s income and assets. For most states, the asset limit for an individual to qualify for Medicaid is very low, often around $2,000. Any assets above this limit, including cash, bank accounts, investments, and certain other property, can make an individual ineligible for benefits.

The Impact of Life Insurance Proceeds

The $210,000 your mother is receiving from your father’s life insurance policy is considered a countable asset. When these funds are added to her existing assets, they will almost certainly put her well over the Medicaid asset limit, at least temporarily. This could lead to a period of ineligibility for Medicaid.

“Spending Down” Assets: What’s Allowed and What’s Not

The concept of “spending down” assets is a strategy to reduce countable assets to meet Medicaid limits. However, there are strict rules about how this money can be spent.

Allowed Expenditures

• Paying off debts: Your mother can use the money to pay off her own existing debts, such as credit card balances, mortgages on exempt property, or medical bills.
   
• Purchasing exempt assets: Certain assets are generally not counted toward the Medicaid asset limit. These often include:
  • A primary residence. If your mother owns a home, it’s typically an exempt asset up to a certain equity limit (which varies by state).
  • One vehicle. Usually, one car of any value is considered an exempt asset.
  • Household goods and personal effects. Furniture, appliances, clothing, and jewelry (up to certain limits) are typically exempt.
  • Prepaid funeral and burial arrangements. Funds set aside for a funeral can be exempt.
• Medical expenses not covered by Medicaid: If your mother has medical needs that Medicaid doesn’t cover, she can use the funds for these expenses.

Prohibited Actions (and Why)

• Gifting or transferring assets: Giving away the money or transferring it to you or someone else for less than fair market value is a major pitfall. Medicaid has a “lookback” period (usually five years) during which they review financial transactions. If assets were transferred for less than their true value during this period, your mother could be penalized with a period of Medicaid ineligibility. This is to prevent people from divesting themselves of assets simply to qualify for benefits.
• Purchasing assets for others: Using your mother’s money to buy a house or car in your name, even if the intention is for her to use them, would be considered a transfer of assets and subject to the lookback period.
• Creating certain trusts: While certain types of trusts can be used for asset protection, establishing a trust that allows your mother to retain control or benefit from the funds while simultaneously trying to qualify for Medicaid is highly complex and often subject to strict rules and penalties.

Your Specific Questions: Buying a House and a Car

1. Buying her a house: If your mother uses the $210,000 to purchase a house in her name that will serve as her primary residence, this purchase itself would generally be an exempt asset. However, it’s crucial to ensure the purchase is made quickly to spend down the cash asset before it affects her eligibility. The value of the home and any equity limits in your state would need to be considered.
    
2. Buying her a car: Similarly, if she purchases a car in her name for her own use, this vehicle would typically be an exempt asset.

Key Considerations and Next Steps

• Timing is crucial: The speed at which the life insurance proceeds are spent down is critical. The sooner the funds are used for allowable expenditures, the less impact they will have on her Medicaid eligibility.
• State-specific rules: Medicaid rules vary significantly from state to state. What is allowed in one state might not be in another. It’s imperative to understand the specific asset limits, lookback periods, and exempt asset rules in your mother’s state.
• Professional advice is essential: Given the complexity and potential for severe penalties, you absolutely need to consult with an elder law attorney in your mother’s state. They can:
  • Provide precise information on your state’s Medicaid rules.
  • Help you create a spend-down plan that complies with regulations.
  • Advise you on the best way to handle the life insurance proceeds to preserve her Medicaid eligibility without incurring penalties.
  • Help you understand any specific exemptions or strategies that might apply to your mother’s situation.

While your intentions are admirable, navigating Medicaid rules without professional guidance can lead to costly mistakes and a loss of essential benefits for your mother. Seek legal advice as soon as possible.