By Keith Lyman , Attorney Washburn University School of Law
Updated by Bethany K. Laurence , Attorney UC Law San Francisco
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Many individuals who apply for Medicaid long-term care (a nursing home, assisted living, or home health care) find that they have too many assets to qualify. Medicaid is a "needs-based" program for people with low income, and a successful Medicaid applicant can't have assets that they could sell to pay for their own care. Medicaid's asset limits vary by state, but many states use an asset limit of $2,000 (or $3,000 for a married couple if both spouses are applying for Medicaid). Some states, like New York and Illinois, allow you to keep significantly more assets, and other states, like Connecticut, less. California is the only state that doesn't have an asset limit for Medicaid, starting in 2024. The process of reducing the value of your assets to qualify for Medicaid is referred to as "spending down."
Spend down essentially means spending some cash that you have in the bank or selling some "countable" assets (such as stocks or extra vehicles) and then spending down that money.
One misconception is that the only way to reduce assets is to spend them on the Medicaid applicant's medical care. (Some people confuse spending down income each month for the Medically Needy program with spending down assets.) In reality, there are a wide range of expenses that can reduce a Medicaid applicant's net worth enough to qualify for Medicaid. But one key rule is that you can't give away assets for less than they're worth (within five years of applying for Medicaid).
First, you should know that some assets don't have to be spent or sold to qualify for Medicaid, so these don't need to be sold or spent down. Here are the most common assets that Medicaid doesn't count toward the asset limit: your home (in some circumstances), one car, personal effects, household goods and furnishings, some prepaid funeral and burial arrangements, and a limited amount of cash ($2,000 for an individual if there are no other assets).
Most states' Medicaid programs count retirement accounts, like 401(k)s and IRAs, as assets. A spouse's retirement accounts are exempt in some states but not others.
For married couples, Medicaid generally counts assets belonging to both spouses. But when only one spouse is applying for Medicaid, and the at-home spouse doesn't have many assets in their own name, the spouse is allowed to keep an amount called the Community Spouse Resource Allowance (CSRA). The CSRA is generally between $30,828 and $154,140, though the amount varies by state.
The determination of whether any assets are exempt, and to what extent, is made on a case-by-case basis. Your state's Medicaid program will take into account state laws as well as your marital status, living arrangements, and other factors.
Spending down your money and assets on the following expenses is ordinarily acceptable by most states' Medicaid programs. Each state is different, but most of the allowable Medicaid spend-down items discussed below work in any state. To be sure, you may want to look into your state's law or consult an estate planning lawyer before spend-downing the following assets to qualify for Medicaid.
Medicaid applicants can prepay their mortgages years in advance, since they're legally obligated to pay the full amount of the loan eventually. But keep in mind that prepaying a mortgage will give the owner "equity" in the house (market value of the house minus the mortgage). Medicaid will only ignore a certain amount of equity in a Medicaid applicant's home:
A Medicaid applicant can pay any legitimate debt that the applicant or the applicant's spouse is legally obligated to pay. Examples include debt for credit cards, medical bills, taxes, car payments, rent, utilities, and the costs of home repair or car maintenance.
Full or partial payments. You can pay off credit cards and automobile loans in full or just partially. The same is true for bank loans or other personal loans the applicant or spouse is legally obligated to pay.
Pre-Payment. In the case of an auto loan or other type of loan, the Medicaid applicant or spouse can prepay the loan off, since they're legally obligated by the loan contract to pay the full amount of the loan, even though they could continue to just make monthly payments.
This does not hold true, however, in all cases of money owed. For example, a Medicaid applicant can pay a caregiver, even a relative, for caregiver services. But Medicaid won't allow a caregiver to be paid in advance for services not yet provided. A pre-payment for services that haven't been provided yet will be treated as a gift and will result in a period of Medicaid ineligibility.
The same applies for prepayment of any expense before services are provided or before the applicant has received the benefit. For example, pre-payment of utilities is normally not allowed, since the Medicaid applicant hasn't received the benefit of the future services yet, and could terminate a utility at any time. Pre-payment of medical services, medications, or rent is also not allowed for the same reasons.
You or your spouse can also use money or assets to buy new, exempt assets. For example, you can purchase a new home if it meets the requirements for being an exempt home. Likewise, your or your spouse can purchase a new automobile to drive. Since household goods and furnishings are ordinarily noncountable, purchasing those types of items is also allowed.
A Medicaid applicant can make any needed payments to maintain or improve a noncountable asset. An example is to make home improvements or repairs to a home that's exempt from Medicaid. Plumbing repairs, home improvement projects, repairs to a roof, installation of a new roof, landscaping, and additions to a home are all allowable expenses for an exempt home. Likewise, maintenance on and repairs to an automobile are allowable expenses.
Most states will allow for the pre-payment of certain funeral and burial expenses even though the Medicaid applicant won't receive the benefit at the time of payment. This can be a complicated issue, however, since individual states have their own rules about what can be purchased and how much can be invested in these expenses. Check with your individual state Medicaid program or an estate planning or elder law attorney for detailed information.
You can purchase an annuity contract with a lump sum of money in exchange for receiving a guaranteed monthly income for a number of years. This is a great way to spend down assets if you're married.
When you spend a lump sum of money on an annuity for your spouse, your spouse is guaranteed a fixed income for their life expectancy. (Your spouse's income is not counted toward Medicaid eligibility.)
But in order for an annuity to work as a way to spend down resources, it must meet certain requirements; for example, the annuity must be nontransferable and your state's Medicaid agency must be listed as a beneficiary after the death of your spouse. For more information, see our article on using annuities for Medicaid long-term care planning.
Most states will allow a Medicaid applicant to make payments for caregiving services, especially when this helps keep the applicant at home or out of a more expensive nursing facility. This is true even when the caregiver is an adult child or sibling.
Every state has its own set of rules that you must comply with, but all states require you to have a written agreement with your caregiver. As a general rule (as mentioned earlier), prepayment for future caregiver services isn't allowed. There is, however, a way to safely transfer your house to your child if the child is your caregiver who lives with you.
For more information on this and other ways to transfer your resources, see our article on safe Medicaid asset transfers.