Is It Necessary to Spend Down Your Assets to Qualify for Medicaid Insurance?

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Medical claims in your retirement years can quickly become higher than you can afford. Medicaid insurance can help prevent you from having to declare medical bankruptcy, but there are some qualifications for Medicaid you must know about before you apply.

The Medicaid Spend-Down

Medicaid is intended to help people with limited assets and income. If you have too much of either, you must dispose of the excess before qualifying. The good news is that the required spend-down of your assets does not count all of them. Some of them are countable, and others noncountable.

PayingforSeniorCare says the following assets are countable: cash, checking and savings accounts, retirement accounts, a primary residence, investments in CDs, stocks, mutual funds, and bonds. Individual retirement accounts (IRAs) and 401(k)s may or may not be counted depending on where you live.

There are also some noncountable items they allow you to keep when you apply for Medicaid. They include term life insurance, whole life insurance having a combined cash value of less than $1,500, one vehicle, household effects and appliances, jewelry, and prepaid burial and funeral expenses.

Most states allow applicants to have assets of $2,000. Some states permit you to have more, such as Nebraska, where the limit is $4,000. When both spouses apply, the limit is often $3,000—but New York allows you to have up to $30,182, and California will let you have up to $130,000 in assets.

The spend-down qualification requires applicants to use up their assets to qualify. They must reduce them to the qualifying level the state requires where they live.

After all your assets and income are counted, if you still have too much, you will have to spend down your income to bring it to a place where you can be classified as having a limited income. Some states will give you six months to spend down your assets. You can use them on medical expenses or to pay past medical bills, as well as to pay health insurance premiums, prescription medications, and doctor’s visits.

Married Couples, but Only One Applicant

When there is only one applicant from a marriage, the state considers the assets jointly owned. The applicant is limited to $2,000 in assets, but the other spouse (called a community spouse) can have much more. The maximum allowable amount in any state for the community spouse is $148,620 ($154,140 in 2024). Other states may limit the couple to retain only $29,724 in assets.

Expenditures Permitted by Applicants for the Spend-Down

When your state requires you to spend down your assets and income you can do it several ways. Nolo recommends that you consult with a financial adviser first to ensure that the methods used conform with your state’s regulations. The adviser might suggest:

• Pay off legitimate debt.

You can pay for all legally obtained debt—in part or in full—to reduce your assets. It can include credit card debt, medical bills, utilities, mortgage payments, rent, costs to maintain your home or car, and debt owed by either spouse.

• Buy new noncountable assets.

You can use your spend down money, Nolo says, to purchase any noncountable item—even a new home if it qualifies as an exempt home. You can also get a new car if either spouse will drive it. You can also buy new home furnishings.

Medical equipment can also be purchased if Medicare or Medicaid will not pay for it, including buying medical equipment or making your home more accessible. ElderLawAnswers says money can also pay for dental or vision care or to pay a caregiver, but a written contract is required.

• Consider a qualified income trust. 

In some states, SmartAsset says, you can create a qualified income trust (QIT), which is irrevocable. Patients contribute some or all of their income to the trust. The money must be used for medical expenses, including Medicaid premiums. The state must be the primary beneficiary, and the amount paid goes to the state after the patient dies.

• Consider other legitimate ways to spend down assets.

Funeral and burial expenses may also be legitimate ways to spend down your assets, but the terms may differ in each state. Annuities are another way to spend down your assets. They can provide a lifetime of income for the non-applying spouse. Specific requirements apply, Nolo says, such as being nontransferable and the Medicaid agency must be listed as the primary beneficiary after the applicant dies.

Prepayments Not Allowed

A payment for services or items not yet delivered is not permitted. If you do, it may disqualify you from getting Medicaid. Although you can use the money to pay a caregiver, you cannot pay the caregiver in advance. Debts such as car loans, other loans, and mortgages are permitted because they are legitimate debts.

The Five-Year Look Back

When you apply for Medicaid, they will take a look at your finances for the past five years—the look-back period. They do this to discover the assets you owned within the past five years because they want to know what you had and how you disposed of them. The American Council on Aging says that some ways of disposing of your assets are illegal, such as gifting, which may cause your Medicaid benefits to be denied.

If there are questions about your assets within the past five years, MarketWatch says you may need to pay for the long-term care out of your pocket during a penalty period. It may be necessary until they are satisfied with the payments, then they will begin covering the cost.

Spend-Down Limits May Result in Limited Payments

States operate differently as to how they handle the spend-down requirements. Some states may require you to send a monthly payment directly to Medicaid when your income is too high, MedicareInteractive says. You may also need to submit receipts or bills for qualified expenses to show you meet the requirements. Some states will only provide Medicaid payments when your income is within the limits for that period.

Qualifying for Medicaid by spending down your assets and income can be tricky. Before making any decisions, consult a professional estate planner to ensure you have the correct guidelines to get the financial help you need.

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