How Do You Protect Assets from Medicaid Spend Down? 7 Tips

Long-term care is costly. Nursing home care can cost over $127,000 a year. Many families rely on Medicaid to help pay for this care. But Medicaid limits how much money and property you can own.

If your assets are too high, Medicaid requires you to spend them down before you qualify. Planning ahead can help avoid this.

Now, how do you protect assets from Medicaid spend down? It starts with early planning. In most states, a single person can keep only $2,000 in countable assets. Medicaid also reviews your finances from the past five years, known as the look-back period.

There are legal ways to protect some of your assets and still qualify for Medicaid. One simple option is prepaid funeral planning. This is an approved spend-down expense that lowers countable assets.

If you have questions about planning a cremation, the After team is here to help. Call 1-844-760-0427 anytime or explore prepaid cremation plans online.

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Understanding Medicaid Spend Down and The Look-Back Period

Medicaid spend down happens when your assets are higher than your state allows for long-term care coverage. Before Medicaid will help pay for care, you must reduce extra assets by spending them on approved expenses.

You cannot give money or property away to qualify faster. Medicaid checks all financial activity during the five-year look-back period, also called 60 months.

During this review, Medicaid looks at bank records, property transfers, and gifts. If you gave away assets for less than fair value, Medicaid may apply a penalty. This penalty delays your coverage.

The length of the delay depends on how much you transferred and your state’s average nursing home costs.

What Assets Count Toward Medicaid Limits?

Countable assets usually include:

• Cash and savings
• Checking and bank accounts
• Investment accounts
• Vacation homes or second properties
• Extra vehicles
• Many retirement accounts, such as 401(k)s and IRAs (rules vary by state)

Exempt assets do not count toward the limit. These often include:

• Your primary home if you or your spouse lives there
• Home equity up to state limits (2026 projections are $752,000 to $1,130,000)
• One vehicle
• Household items and personal belongings
• Irrevocable funeral trusts

Rules differ by state, so professional guidance matters.

State Differences in Look-Back Rules

Most states use a five-year look-back period. Some states follow different rules:

• California uses a 30-month look-back instead of five years.
  
• New York has a 60-month “look back” for Nursing Home Medicaid, but there currently is no “look back” for Community Medicaid. They plan to implement a 30-month Look-Back Period eventually.

These differences can affect which strategies work best.

7 Strategies: How Do You Protect Assets From Medicaid Spend Down? 

You can protect assets from Medicaid spend down through strategic planning well before you need long-term care. These seven approaches offer legal protection while maintaining Medicaid eligibility. Each requires professional guidance from elder law attorneys or Medicaid planners.

1. Medicaid Asset Protection Trusts (MAPTs)

A Medicaid Asset Protection Trust removes assets from your countable resources if established at least five years before applying for Medicaid. You transfer assets into an irrevocable trust that you cannot modify or dissolve.

The trust protects your primary residence, investments, or other valuable assets from both Medicaid spend-down requirements and estate recovery after death. You can live in a home owned by the trust and receive income from trust investments, but you cannot access the principal.

Key considerations for MAPTs:

• You permanently lose control of transferred assets.
• The trust cannot hold retirement accounts. You must liquidate 401(k)s or IRAs to fund it.
• You need an elder law attorney to structure the trust properly.
• Five-year look-back period applies from the day you transfer assets.
• Trustees and beneficiaries must align on how assets will be managed and distributed.

MAPTs work best for individuals who own substantial assets and have at least five years before anticipated long-term care needs. The strategy protects your legacy for heirs while ensuring Medicaid covers your care costs.

2. Life Estate Arrangements

A life estate lets you transfer property ownership while retaining lifetime use rights. You become the "life tenant" with full rights to live in the property. The "remainderman" is typically a child or spouse. They assume full ownership upon your death.

This strategy removes property from your countable assets after the look-back period expires. You avoid probate, maintain housing security, and protect home equity that exceeds your state's exemption limits.

Risks to consider:

• You cannot sell the property without the remainderman's consent.
• The property could face liens if the remainderman experiences divorce or creditor claims.
• The arrangement is irrevocable. You cannot reclaim full ownership.
• Fair market value must be clear to avoid transfer penalties.

Life estates work well for primary residences worth more than state exemption limits. They provide asset protection while ensuring you maintain your home throughout your lifetime.

3. Medicaid-Compliant Annuities

Medicaid-compliant annuities convert lump-sum assets into monthly income streams that don't count toward asset limits. You purchase the annuity with excess funds, immediately reducing your countable assets while generating income.

This strategy helps when you need long-term care suddenly and don't have five years to wait. The annuity generates income to cover care costs during any penalty period from other asset transfers.

Annuity requirements:

• Your state Medicaid agency must be named as the primary beneficiary.
• Payments must be immediate and non-deferrable.
• The annuity must be irrevocable and non-transferable.
• Payment terms cannot exceed your life expectancy.
• Not all annuities qualify, so consult a Medicaid planning specialist.

Annuities cost more than other protection strategies and follow complex state-specific rules. They serve as a stopgap solution when timing doesn't allow for longer-term planning strategies.

4. Strategic Gifting Programs

Strategic gifting gradually transfers assets over time to minimize look-back penalties. You can gift up to $19,000 annually per recipient without federal gift tax consequences, though Medicaid still counts these transfers during the look-back period.

If you start a gifting program five or more years before anticipated Medicaid needs, that avoids penalties entirely. Some states permit small monthly gifts without penalties.

In Pennsylvania, Medicaid usually won’t penalize small gifts that add up to less than $500 in a month. This is $500 total per month, not $500 per person. If you give more than $500 in a month, the exception usually doesn’t apply.

Gifting exceptions that avoid penalties:

• Transfers to a spouse or blind/disabled child of any age
• Transfers to a trust for a disabled person under 65
• Home transfers to a sibling with equity interest who lived there for at least one year
• Home transfers to a caregiver who provided care for at least two years

The Child Caregiver Exception gives significant protection. If your adult child lives with you for at least two years and provides care that delays nursing home placement, you can transfer your home to them without penalty.

Proper documentation proving the care relationship is essential.

5. Personal Care Agreements

Personal care agreements formalize family caregiving arrangements and create an allowable spend-down expense. These legally binding contracts allow you to pay family members fair market rates for care services without triggering look-back penalties.

The agreement must be drafted by an elder law attorney and signed before care begins. It outlines specific duties, responsibilities, and compensation based on local professional caregiver rates.

Elements of a valid personal care agreement:

• Detailed description of care services provided
• Compensation matching local market rates for similar care
• Payment schedule and method
• Duration of agreement
• Signatures from both parties and witnesses

You can only compensate caregivers for services provided after the agreement is signed because retroactive payments violate look-back rules. The arrangement must be reasonable and reflect genuine care needs rather than disguised gifting.

6. Prepaid Funeral Arrangements

Irrevocable funeral trusts protect funds designated for end-of-life expenses while reducing countable assets. Most states allow reasonable amounts for funeral and burial costs without specific limits. These arrangements must be irrevocable to qualify as exempt assets.

Learn more about how Medicaid can affect cremation costs in this post.

After offers prepaid cremation plans that serve as both practical planning and strategic spend-down expenses. You secure transparent, affordable cremation services at today's rates while removing assets from Medicaid calculations.

Benefits of prepaid cremation with After:

• Reduces countable assets without triggering look-back penalties
• Locks in current pricing and protects against inflation
• Removes financial burden from family members during difficult times
• Ensures your final wishes are documented and honored
• Protects funds from Medicaid estate recovery

Prepaid arrangements work immediately. You don't need to wait five years like other protection strategies. The funds are permanently set aside for funeral expenses and cannot be recovered by Medicaid. You can get answers to FAQs about these prepaid plans here.

7. Paying Off Debt And Purchasing Exempt Assets

Using excess assets to pay legitimate debts and purchase exempt items provides immediate spend-down without penalties. This strategy works when you need Medicaid quickly and don't have time for longer-term planning.

Allowable debt payments and purchases:

• Mortgage balances, credit card debt, and personal loans
• Vehicle purchases or repairs at fair market value
• Home modifications for accessibility (ramps, bathroom safety features, stairlifts)
• Medical devices not covered by insurance (dentures, hearing aids, eyeglasses)
• Home repairs and improvements that enhance safety or accessibility

You can sell an old vehicle and purchase a newer one at market rates. Home modifications that improve accessibility count as legitimate spend-down expenses. This includes wheelchair ramps, walk-in showers, and wider doorways.

Keep detailed records of all transactions. Save receipts, invoices, and proof of payment. Documentation protects you during Medicaid's application review and demonstrates compliance with spend-down rules.

When Should You Start Medicaid Planning?

Start Medicaid planning at least five years before you expect to need long-term care. This gives your plan time to pass the look-back period before you apply for Medicaid.

If you have long-term care insurance that covers five years, start planning when that coverage begins. This helps your asset protection plans take effect when the insurance ends.

If you are helping aging parents, start planning while they are still healthy and living on their own. Waiting until a health emergency limits your options and can lead to costly, last-minute decisions.

Working With Medicaid Planning Professionals

Medicaid rules vary by state and can be hard to follow. Mistakes can lead to denied benefits or long delays. An elder law attorney who focuses on Medicaid planning can help you avoid these problems.

A qualified professional reviews your finances and explains the rules in your state. They recommend strategies that match your needs and timeline.

They also prepare legal documents, make sure you follow the look-back rules, and help with the Medicaid application process.

Professional help does cost money. Trusts and legal planning can cost several thousand dollars. These costs are often allowed as spend-down expenses and can help protect much larger assets for your family.

One part of Medicaid planning that professionals often recommend is prepaid funeral arrangements. In many states, these plans can count as an allowed spend-down expense, which means they can lower your countable assets without causing penalties.

Plan a Cremation With After

Are you thinking about how to protect assets from Medicaid spend down while planning for end-of-life care? After’s prepaid cremation plans help with both.

Prepaid cremation is an approved spend-down expense. It lowers countable assets while locking in affordable cremation services at today’s prices.

This planning protects funds from Medicaid recovery and reduces stress for your loved ones. The After team is here to help with care and clarity. Call 1-844-760-0427 anytime or explore prepaid cremation plans online.

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Frequently Asked Questions About Protecting Assets From Medicaid

Can I Gift Assets to Family Members Before Applying for Medicaid?

Yes, you can gift assets to family members before applying for Medicaid. Gifts made more than five years before applying usually do not cause penalties.

Gifts made within five years often lead to a Medicaid delay. Some transfers may be exempt, such as to a spouse, disabled child, or caregiver child.

What Happens If I Need Medicaid Before The Five-Year Look-Back Expires?

Medicaid may delay coverage if you need Medicaid before the five-year look-back period expires. Any gifts or transfers made during that time can cause penalties.

You can reduce the delay by recovering assets or spending down on approved expenses. Some people use Medicaid-compliant annuities to help cover costs during the delay.

Explore financial assistance options for cremation if you’re facing immediate costs with limited resources.

Does Medicaid Take My House After I Die?

Medicaid may take repayment from your estate after you die. This is called Medicaid estate recovery. Your home may be protected if a spouse, minor child, or disabled child lives there. Trusts, life estates, and early planning can also protect the home.

Are Retirement Accounts Protected From Medicaid Spend Down?

In most states, retirement accounts are not protected from Medicaid spend down. Many states count 401(k)s and IRAs as assets.
Some states allow exemptions if required withdrawals are taken. Rules vary, so planning help is important.

Read about burial insurance vs. life insurance options to see other ways to set aside funds for end-of-life costs without affecting eligibility.

How Much Can I Keep in Assets When My Spouse Needs Medicaid?

When your spouse needs Medicaid, the healthy spouse can keep a set amount. This is called the Community Spouse Resource Allowance. The limit depends on the state, and it changes regularly according to the latest updates. Some assets, like the home and one vehicle, are usually exempt.