Receiving an unexpected inheritance should feel like a blessing, not a source of anxiety. But if you or a loved one receives Medicaid benefits, suddenly inheriting money can trigger a whirlwind of questions and concerns. The short answer? Yes, inheriting money can significantly impact your Medicaid eligibility—and in some cases, you may need to repay benefits you've already received.
Let me share a story that illustrates just how complicated this can get. A Brooklyn woman I'll call Maria had been receiving Medicaid long-term care benefits for nearly three years when her elderly aunt passed away, leaving her $35,000. Maria was thrilled—until she received a letter from the state informing her that she'd lost her Medicaid coverage. Worse, because she hadn't reported the inheritance immediately, she owed the state for several months of benefits she'd received after inheriting the money.
Understanding How Inheritance Affects Your Medicaid Coverage
When you receive an inheritance while on Medicaid, the money is treated differently depending on timing. In the month you receive it, the inheritance counts as income. If any money remains after that first month, it becomes a countable asset. This distinction matters because Medicaid has strict income and asset limits—typically around $2,000 in countable assets for individuals in most states, including New York.
Here's where it gets tricky: If the inheritance pushes you over these limits, you'll lose Medicaid eligibility for that period. You're required to report the inheritance to your state Medicaid agency immediately—usually within 10 days of receiving it. Failing to report can lead to serious consequences, including being required to pay back the cost of any Medicaid services you received during the time you were technically ineligible.
The good news? There are legal strategies to protect your eligibility, but they require quick action and proper guidance.
The "Spend Down" Strategy: Your First Line of Defense
If you've inherited money and want to maintain your Medicaid coverage, the most immediate option is to "spend down" the inheritance within the month you receive it. This means using the money on approved expenses that won't count against you.
Acceptable spend-down expenses typically include:
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Paying off existing debts (credit cards, medical bills, mortgage arrears)
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Essential home repairs or modifications for accessibility
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Purchasing exempt assets like a vehicle or burial plot
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Prepaying funeral expenses
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Paying property taxes or homeowners insurance
What you can't do is simply give the money away to family members or friends. Medicaid has a five-year "look-back" period for asset transfers, and gifting money can result in a penalty period where you're ineligible for benefits. This is a common mistake that can have devastating consequences.
Medicaid Estate Recovery: The Long-Term Consideration
Even if you successfully navigate receiving an inheritance while alive, there's another concern: Medicaid Estate Recovery. This federal program requires states to attempt to recover the costs of certain Medicaid benefits from the estates of deceased recipients who were age 55 or older.
In New York, estate recovery applies only to probate assets—property that passes through your will or by intestacy laws if you don't have a will. Assets that pass directly to beneficiaries, like life insurance policies, retirement accounts with designated beneficiaries, or property held jointly with rights of survivorship, are generally protected from recovery.
The state will defer recovery if you have a surviving spouse, a child under age 21, or a child of any age with a permanent disability. However, "defer" doesn't mean "forgive"—the state can still pursue recovery later once these conditions no longer apply.
Protecting Your Future: Proactive Planning Makes All the Difference
The best time to protect an inheritance from affecting Medicaid is before you receive it—ideally, while the person leaving you the inheritance is still alive and can adjust their estate plan accordingly. Special Needs Trusts or other types of trusts can be established to hold inherited assets without disqualifying you from Medicaid.
If you know you might receive an inheritance in the future, consider these protective strategies:
Irrevocable Trusts: Assets placed in a properly structured irrevocable trust at least five years before applying for Medicaid won't count against eligibility limits.
Disclaiming the Inheritance: While you technically don't have to accept an inheritance, this option requires careful consideration. The inheritance would then pass to the next person in line under the will or state law, and you'd have no control over it.
Third-Party Special Needs Trusts: If someone wants to leave you an inheritance without jeopardizing your benefits, they can establish a trust specifically designed to supplement—not replace—your government benefits.
For families in Brooklyn, Queens, and Staten Island who are navigating these complex waters, understanding your options is crucial. At Alatsas Law Firm, we've helped countless middle-income families protect their assets while maintaining essential Medicaid benefits. The key is planning ahead whenever possible and acting quickly when an inheritance arrives unexpectedly.
Taking Action When You Receive an Inheritance
If you've just inherited money while receiving Medicaid, don't panic—but don't delay either. Here's what you should do immediately:
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Report the inheritance to your state Medicaid agency within the required timeframe (typically 10 days in most states).
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Consult with an elder law attorney before spending or moving any money. The rules are complex, and mistakes can be costly.
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Document everything related to how you spend the inheritance if you're pursuing a spend-down strategy.
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Understand your state's specific rules, as they can vary significantly from one state to another.
The reality is that Medicaid rules around inheritances are designed to ensure program resources go to those with genuine financial need. While this makes sense from a policy perspective, it can feel overwhelming when you're facing these situations personally.
Remember Maria from the beginning of this article? After working with an elder law attorney, she was able to resolve her situation by using the inheritance to pay off her mortgage and make necessary home repairs, bringing her assets back below the eligibility threshold. She also established proper planning to protect her home from future estate recovery. It wasn't a simple process, but with proper guidance, she maintained her essential coverage while putting the inheritance to good use.
Your Next Steps
Inheriting money while on Medicaid doesn't have to mean losing your benefits or facing overwhelming repayment demands. With proper planning and immediate action, you can navigate these challenges successfully. The most important thing is to seek experienced legal guidance quickly—before you make decisions that could jeopardize your eligibility or trigger penalties.
Have you or a family member faced challenges with Medicaid and inheritances? What questions do you still have about protecting your eligibility? Understanding your options is the first step toward securing your family's financial future while maintaining the care and coverage you need.
