Life Insurance Payouts: Medicaid Eligibility Impact Explained

If you're a Medicaid beneficiary, receiving a life insurance inheritance can impact your eligibility. Medicaid is a needs-based, federal-state program that serves people with low incomes, so your earnings and assets must not exceed a certain limit. This means that if you receive an inheritance, your income may be pushed over the eligibility threshold, causing a benefit or eligibility cliff.

If you're a Medicaid recipient and you receive an inheritance, you must report it to your state Medicaid agency within 10 days. If you don't, and the inheritance would have made you ineligible, you'll have to reimburse the state for your expenses during the time you were ineligible.

Medicaid eligibility requirements

Medicaid is a federal-state program that, together with the Children's Health Insurance Program (CHIP), provides health coverage to over 77.9 million Americans. It is the single largest source of health coverage in the United States.

Medicaid is a needs-based assistance program that serves people with lower incomes. It is not age-dependent. To be eligible for Medicaid, your earnings and assets must not exceed a certain limit. This limit varies by state and program.

Financial Eligibility

The Affordable Care Act established a new methodology for determining income eligibility for Medicaid, based on Modified Adjusted Gross Income (MAGI). MAGI is used to determine financial eligibility for Medicaid, CHIP, and premium tax credits and cost-sharing reductions available through the health insurance marketplace. MAGI is the basis for determining Medicaid income eligibility for most children, pregnant women, parents, and adults.

Some individuals are exempt from the MAGI-based income counting rules, including those whose eligibility is based on blindness, disability, or age (65 and older). Eligibility for these groups is generally determined using the income methodologies of the SSI program administered by the Social Security Administration.

Certain Medicaid eligibility groups do not require a determination of income by the Medicaid agency. This coverage may be based on enrollment in another program, such as SSI or the breast and cervical cancer treatment and prevention program.

Non-Financial Eligibility

To be eligible for Medicaid, individuals must also meet certain non-financial eligibility criteria. They must be residents of the state in which they are receiving Medicaid and either citizens of the United States or certain qualified non-citizens, such as lawful permanent residents. In addition, some eligibility groups are limited by age, or by pregnancy or parenting status.

State-Specific Eligibility

Medicaid is a joint federal and state program, and each state has specific eligibility criteria. For example, in California, Medicaid (Medi-Cal) recipients can give away inheritance money, which is considered "income", in the month it is received. Additionally, Medi-Cal recipients have no asset limit and can have unlimited assets while still being eligible for long-term care benefits.

To determine your specific state's eligibility requirements, you can refer to your state's official website or contact your state Medicaid agency.

Inheritance as income

If you are a Medicaid recipient and receive an inheritance, you are legally required to report it to your state Medicaid agency. This change in circumstance must generally be reported within 10 calendar days. If you do not, and the inheritance would have disqualified you from Medicaid, you will have to reimburse Medicaid for any benefits received during the time you were otherwise ineligible.

In the month when the inheritance is received, it is considered unearned income. This means that, unless the inheritance is very modest, it will likely push you over the income limit, resulting in Medicaid ineligibility for that month. If the money is spent in its entirety during the month of receipt without violating Medicaid's Look-Back Rule, you will be eligible for Medicaid again the following month.

Medicaid's Look-Back Rule considers a long-term care Medicaid applicant's asset transfers for 60 months immediately preceding the application to ensure assets were not given away or sold under fair market value. It also considers a Medicaid beneficiary giving away an inheritance as a violation of this rule, resulting in a Penalty Period. California is an exception, as Medicaid beneficiaries can give away "income", including an inheritance, in the month it is received.

If an inheritance is not spent in its entirety during the month of receipt, any remaining sum will count as an asset the following month. Depending on the remaining amount, this can cause you to be asset-ineligible. This means you will not be eligible for Medicaid until the "excess" assets (the assets over Medicaid's asset limit) are "spent down".

There are several ways in which you can spend down an inheritance to meet Medicaid's asset limit without violating the Look-Back Rule. These include paying off debt, purchasing an Irrevocable Funeral Trust to prepay for funeral and burial costs, buying new household furnishings or appliances, and making home modifications. Once you have spent down your assets to Medicaid's asset limit, you can reapply for long-term care Medicaid.

Spending an inheritance

Reporting the Inheritance

If you receive an inheritance while on Medicaid, it is crucial to report it to your state Medicaid agency or the Social Security Administration and Department of Children and Families within the specified timeframe, which is generally within 10 calendar days. Failing to report the inheritance within this window can result in repercussions, such as having to reimburse Medicaid for any benefits received during the period of ineligibility. Therefore, timely reporting is essential to avoid penalties.

Understanding Medicaid's View of Inheritance

Medicaid will consider the inheritance as either income or assets, depending on the timing of receipt. In the month the inheritance is received, it is treated as unearned income and will likely push you over the income limit, resulting in Medicaid ineligibility for that month. Any remaining inheritance in the following month will be counted as assets. Remember that Medicaid has specific asset limits, and exceeding these limits can lead to ineligibility.

Spending Down the Inheritance

If you receive an inheritance while on Medicaid, you may need to "spend down" the inheritance to maintain your eligibility. This means reducing your assets to meet the Medicaid asset limit without violating the Medicaid Look-Back Rule. Here are some ways to spend down the inheritance:

• Paying off debt: You can use the inheritance to pay off any outstanding debts, such as credit card balances or loans.
• Prepaying for funeral and burial expenses: Consider purchasing an Irrevocable Funeral Trust to cover future funeral and burial costs.
• Making home modifications: You can invest in home modifications and additions for safety and accessibility, such as installing ramps or modifying bathrooms.
• Purchasing exempt assets: Buy assets that are exempt from Medicaid's asset limit, such as furniture, appliances, clothing, or a vehicle.
• Paying for long-term care: Use the inheritance to cover the costs of your long-term care during any period of Medicaid disqualification.

Seeking Professional Help

It is highly recommended to consult a Professional Medicaid Planner or an experienced Medicaid lawyer as soon as you become aware that you will be receiving an inheritance. They can provide valuable guidance on how to handle the inheritance in your specific state, implement planning strategies to maximise the amount you can retain, and help you navigate the process without losing Medicaid coverage or the ability to cover your long-term care costs.

Medicaid's Look-Back Rule

The Look-Back Rule considers a long-term care Medicaid applicant's asset transfers for 60 months immediately preceding their application. However, this period varies by state. For example, California has a 30-month look-back period, while New York has no look-back period for Community Medicaid, through which residents receive long-term home and community-based services.

The penalty for violating the Look-Back Rule is a period of time during which the applicant is ineligible for Medicaid. This period is determined by dividing the dollar amount of transferred assets by either the average monthly or daily private patient rate of nursing home care in the applicant's state. There is no maximum penalty period.

There are several exceptions to the rule that allow for asset transfers without incurring a penalty. These include:

• Transferring assets to a spouse who is not also applying for long-term care Medicaid.
• Transferring assets to disabled or blind children.
• Transferring a home to a sibling who owns a portion of the home and has resided there for at least a year.
• Transferring a home to an adult child who served as a caregiver for the applicant for at least two years.

It is important to note that refusing an inheritance while on Medicaid is also considered a violation of the Look-Back Rule, as Medicaid views this as gifting money to someone else.

Medicaid planning

Medicaid is a needs-based assistance program that serves people with lower incomes. As such, your earnings and assets must not exceed a certain limit to be eligible for Medicaid. If you receive an inheritance, this can cause something called a benefit or eligibility cliff, where your income is pushed over a certain level and you are unable to qualify for Medicaid.

If you are a Medicaid recipient and receive an inheritance, you are required to report it to your state Medicaid agency within 10 calendar days. If you do not, and the inheritance would have disqualified you from Medicaid, you will have to reimburse Medicaid for any benefits received during the time you were otherwise ineligible.

Medicaid will view an inheritance as income and/or assets, depending on when the inheritance was received and how long it has been since receipt. This means that receiving an inheritance could cause you to lose your Medicaid benefits. In the month the inheritance is received, Medicaid will view it as unearned income, and it will likely push you over the income limit, resulting in Medicaid ineligibility for that month.

If the inheritance is modest or it has been spent within the month, you may only be deemed ineligible for a certain period of time. If the inheritance is spent in its entirety during the month of receipt and without violating Medicaid's Look-Back Rule, you will be eligible for Medicaid again the following month.

If the inheritance is not spent in its entirety during the month of receipt, any remaining inheritance will count as assets the following month. Depending on the remaining amount, this can cause you to be asset-ineligible. This means you will not be eligible for Medicaid until the "excess" assets are "spent down".

There are several ways to spend down an inheritance to meet Medicaid's asset limit without violating the Look-Back Rule, including:

• Paying off debt
• Purchasing an Irrevocable Funeral Trust to prepay for funeral/burial costs
• Buying new household furnishings or appliances
• Making home modifications and additions for safety and accessibility
• Prepaying for funeral and burial expenses via an Irrevocable Funeral Trust
• Buying assets that are exempt from Medicaid's asset limit, such as furniture, appliances, clothing, or upgrading your vehicle

If you are expecting an inheritance and are on Medicaid, it is recommended that you speak with an experienced Medicaid lawyer to help you create a plan to preserve your benefits.

Frequently asked questions