How to Protect Your Assets from Nursing Home Spend-Down: A Complete Guide

25 Apr How to Protect Your Assets from Nursing Home Spend-Down: A Complete Guide

As healthcare costs continue to rise, one of the most pressing concerns for aging individuals and their families is how to pay for long-term care without depleting a lifetime of savings. Nursing home care in the U.S. can cost upwards of $100,000 per year, and without proper planning, these costs can quickly consume your assets. Fortunately, with the right strategies in place, it is possible to safeguard your wealth and qualify for Medicaid assistance. This comprehensive guide explores the most effective legal and financial approaches to protecting assets from nursing home spend-down.

Understanding Medicaid and the Spend-Down Concept

Medicaid is a joint federal and state program that covers long-term care costs for individuals who meet specific income and asset thresholds. Before you can qualify for Medicaid, you may be required to “spend down” your assets until you meet your state’s eligibility requirements.

However, many people are unaware that with advanced planning, it is possible to legally shelter assets and qualify for Medicaid without losing everything you’ve worked hard to earn.

What Happens to Your Assets When You Enter a Nursing Home?

If you don’t qualify for Medicaid or don’t have long-term care insurance, you will be responsible for nursing home expenses out-of-pocket. This can rapidly deplete your savings and other assets.

The typical progression for covering nursing home costs:

1. Private Pay – You use your personal funds until they’re depleted
2. Long-Term Care Insurance – If you have it, this kicks in according to your policy terms
3. Medicaid – Once your countable assets are reduced to your state’s threshold (typically $2,000-$3,000 for an individual)

Without proper planning, you may find yourself quickly spending through retirement savings that took decades to accumulate. This is why understanding Medicaid eligibility and implementing protection strategies early is crucial.

The Medicaid 5-Year Look-Back Rule

One of the most important aspects of Medicaid planning is understanding the 5-year look-back period. When you apply for Medicaid, the state reviews all asset transfers made in the five years prior to your application. Any transfer made for less than fair market value during this period can trigger a penalty, delaying your eligibility.

Example: If you gifted $60,000 to a family member three years ago, and your state’s average monthly nursing home cost is $6,000, you could be ineligible for Medicaid for 10 months.

This rule makes early planning essential—ideally at least five years before you anticipate needing long-term care.

Key Asset Protection Strategies

1. Irrevocable Medicaid Asset Protection Trust (MAPT)

A MAPT is a powerful legal tool that allows you to transfer assets into a trust that you no longer control directly, effectively removing them from your estate for Medicaid purposes.

Key features:

• Assets must be placed in the trust at least 5 years before applying for Medicaid
• You can still receive income from the trust, but not access the principal
• Upon death, assets pass to your beneficiaries without going through probate
• The trust must be properly structured to comply with Medicaid rules

MAPTs are ideal for protecting the family home, investment accounts, and other valuable property. This is one of the most effective ways to shield assets from both nursing home costs and the Medicaid Estate Recovery Program.

2. Life Estate Deeds

A life estate allows you to transfer property (typically your home) to a loved one while retaining the right to live in the home for the rest of your life. After your death, full ownership passes automatically to the named beneficiary.

Benefits:

• Home is not considered a countable asset after the 5-year look-back period
• Avoids probate and Medicaid estate recovery
• You retain the right to live in and maintain control over the home
• Provides partial capital gains tax benefits to inheritors

Example: Mary transfers her $300,000 home to her daughter while retaining a life estate. Mary continues living in the home. After the 5-year look-back period, if Mary needs nursing home care and applies for Medicaid, the home will not count against her eligibility.

3. Medicaid-Compliant Annuities

A Medicaid-compliant annuity is a financial product that converts a lump sum of money into a stream of income, which can help a healthy spouse (“community spouse”) retain more of the couple’s assets while the other spouse qualifies for Medicaid.

Requirements:

• Irrevocable and non-transferable
• Must provide equal monthly payments
• Term must not exceed the life expectancy of the annuitant
• The state must be named as the remainder beneficiary for at least the amount of Medicaid benefits paid (in most states)

Example: John is entering a nursing home while his wife Susan remains at home. They have $300,000 in savings. Susan could purchase a Medicaid-compliant annuity with $150,000, converting those countable assets into an income stream that won’t disqualify John from Medicaid.

This strategy is particularly useful in protecting assets in married couples when one spouse requires nursing home care.

4. Spousal Impoverishment Protections

Medicaid rules include provisions to prevent the non-institutionalized spouse from becoming impoverished when their partner enters a nursing home.

2025 figures (subject to state variation):

• Community spouse can keep up to $154,140 in assets (Community Spouse Resource Allowance)
• Can also retain a monthly income up to the Maximum Monthly Maintenance Needs Allowance
• The family home is exempt if the community spouse lives there

These protections were specifically designed to ensure that a healthy spouse isn’t forced into poverty when their partner needs long-term care. Consult with an elder law attorney to ensure you’re maximizing these allowances based on your state’s specific rules.

5. Strategic Gifting

While gifting can help reduce your countable assets, timing is everything. Gifts made within the 5-year look-back period will result in penalties.

When done early:

• You can transfer significant wealth to heirs
• It avoids complications with Medicaid eligibility
• Annual gift tax exclusions ($18,000 per recipient in 2025) can be utilized

When done late:

• It can delay care coverage and lead to financial stress
• May create significant periods of Medicaid ineligibility
• Can potentially disrupt care plans

Important: Simply giving assets to children or other family members is rarely the best strategy, as it offers no legal protections and could expose the assets to the recipient’s creditors, divorce proceedings, or mismanagement.

6. Long-Term Care Insurance

If purchased early enough, long-term care insurance can help cover nursing home costs and reduce or eliminate the need for Medicaid altogether. While premiums rise with age, this can be a worthwhile investment for asset protection.

Key advantages:

• Preserves estate assets
• Covers in-home care and assisted living, not just nursing homes
• May allow greater choice in facilities
• Some policies offer return of premium features if care isn’t needed

The best time to purchase long-term care insurance is typically in your 50s or early 60s, when premiums are more affordable and you’re likely to pass medical underwriting.

7. Specialized Trusts for Specific Situations

Special Needs Trusts: These can be established for individuals with disabilities, allowing them to maintain eligibility for government benefits while still having funds available for supplemental needs.

Pooled Trusts: Run by nonprofit organizations, these trusts pool resources from multiple beneficiaries, providing professional management while protecting eligibility for government benefits.

Miller Trusts/Qualified Income Trusts: Used in “income cap” states where your income exceeds Medicaid limits but isn’t enough to cover nursing home costs.

8. Durable Powers of Attorney and Estate Planning Tools

To ensure your wishes are followed and your assets are protected, you should have the following documents in place:

• Durable Financial Power of Attorney: Appoints someone to manage your finances if you’re incapacitated
• Healthcare Power of Attorney: Designates someone to make medical decisions on your behalf
• Living Will / Advance Directive: Specifies your wishes for end-of-life care
• Last Will and Testament: Directs the distribution of assets in your probate estate
• Revocable Living Trust: Avoids probate and provides for management of assets during incapacity

These documents give trusted individuals the legal authority to manage your financial and healthcare matters if you’re unable to, and can be crucial in implementing late-stage planning strategies if needed.

Understanding the Medicaid Estate Recovery Program (MERP)

Many people worry about “nursing homes taking their house,” but what they’re actually concerned about is the Medicaid Estate Recovery Program. MERP is a federal requirement that states seek recovery of Medicaid benefits paid for long-term care from the estates of deceased beneficiaries.

Key points about MERP:

• Recovery is sought from the beneficiary’s probate estate after death
• The primary asset typically recovered is the home
• Recovery cannot occur during the lifetime of a surviving spouse
• States may not pursue recovery if it would cause undue hardship
• Some states pursue expanded recovery from non-probate assets

Ways to avoid MERP:

• Transferring assets to an irrevocable trust at least 5 years before needing Medicaid
• Using life estate deeds with proper planning
• Establishing joint ownership with rights of survivorship (in some states)
• Utilizing enhanced life estate deeds (Lady Bird deeds) where available

How Different Types of Assets Are Treated

Primary Residence

• Generally exempt while you or your spouse lives there
• Subject to equity limits in some states (typically $636,000 to $955,000 in 2025)
• May be subject to estate recovery after death
• Protection strategies: irrevocable trusts, life estates, Lady Bird deeds

Savings and Checking Accounts

• Fully countable assets for Medicaid
• Must be spent down to qualification limits
• Protection strategies: converts to exempt assets, transfer to MAPT 5+ years before applying

Retirement Accounts (401(k)s, IRAs)

• Treatment varies by state
• Some states count only withdrawals as income, others count the entire balance
• IRAs in payout status may be treated differently
• Roth IRAs may have different treatment
• Protection strategies: consider conversions or strategic withdrawals with professional guidance

Life Insurance

• Term policies: no cash value, not counted
• Whole/Universal life: cash surrender value may be counted if face value exceeds state limits (often $1,500)
• Protection strategies: consider term policies or transfer ownership of permanent policies

Vehicles

• One vehicle is typically exempt regardless of value
• Additional vehicles are usually countable
• Protection strategies: transfer to family members outside look-back period

Personal Property and Household Items

• Generally exempt, though luxury items may be counted
• Some states have specific exemptions for family heirlooms
• Protection strategies: reasonable downsizing or transfers of valuable collections

Common Questions Answered

Can a nursing home take your house?

Technically, a nursing home doesn’t “take” your house. But if you’re on Medicaid, the Medicaid Estate Recovery Program (MERP) may attempt to recover costs from your estate after your death—which can include your home. That’s why placing your home into an irrevocable trust or establishing a life estate well before needing care is key to protecting it.

Will an irrevocable trust protect my assets from a nursing home?

Yes—when created and funded properly at least five years before applying for Medicaid, an irrevocable trust can shield those assets from being counted. However, you must give up control of the assets, and the trust must be structured carefully to comply with Medicaid rules. Working with an experienced elder law attorney is crucial to ensure the trust achieves its intended purpose.

Can a nursing home take your savings or retirement accounts?

No, nursing homes don’t “take” your money—but they do require payment for services. Medicaid will consider your liquid assets, including savings and some retirement accounts, when determining eligibility. Certain assets, such as IRAs in payout status or Roth IRAs, may be handled differently depending on the state, so it’s critical to work with a professional familiar with your state’s specific rules.

What happens to your Social Security check in a nursing home?

If you’re on Medicaid, most of your income—including your Social Security check—goes toward the cost of your care, except for a small personal needs allowance (typically $30-$70 per month, depending on your state). This doesn’t mean the nursing home takes your Social Security check directly; it’s part of the Medicaid cost-sharing requirement. The community spouse may be entitled to a portion of this income under spousal impoverishment protections.

Can a nursing home take your inheritance?

If you’re on Medicaid and receive an inheritance, that inheritance becomes a countable asset—and you may lose Medicaid eligibility unless you take immediate steps, like disclaiming it (rarely advisable) or using a special needs trust or spend-down strategy. Medicaid may also pursue estate recovery after your death, especially if the inheritance passes through your probate estate.

What’s the best way to protect an elderly parent’s assets?

Encourage your parent to meet with an elder law attorney to develop a comprehensive estate and asset protection plan. Key tools include:

• Durable Power of Attorney with specific Medicaid planning provisions
• Irrevocable Trusts established well before the need for care
• Long-Term Care Insurance (if still insurable)
• Medicaid Planning that complies with current regulations
• Medical Power of Attorney and Advance Directives
• Careful titling of assets and beneficiary designations

The earlier this planning begins, the more options will be available.

Is power of attorney responsible for nursing home bills?

No, having power of attorney doesn’t make someone personally responsible for nursing home costs—unless they sign a contract agreeing to be financially liable. It’s important to review any admissions paperwork carefully before signing and to clearly identify yourself as “attorney-in-fact” when signing documents. An experienced elder law attorney can help agents understand their rights and responsibilities.

Clearing Up Common Misconceptions

Many misconceptions exist about nursing homes and asset protection. Let’s address the most common ones:

“They’ll take everything I own”

Reality: Nursing homes don’t “take” assets, but care costs can deplete savings quickly without proper planning. With advance planning, significant assets can be protected.

“Just give everything to your kids”

Reality: Gifting within the 5-year look-back period can create serious eligibility problems. Also, once gifted, those assets belong to your children and are subject to their creditors, divorces, and financial decisions.

“I have a revocable trust, so my assets are protected”

Reality: Only properly structured irrevocable trusts provide protection from Medicaid spend-down. Revocable trusts offer no asset protection for Medicaid purposes.

“Medicare will cover my nursing home stay”

Reality: Medicare only covers limited rehabilitation stays (up to 100 days maximum) following a qualifying hospital admission. It doesn’t cover long-term custodial care.

“I’ll just transfer assets when I get sick”

Reality: Last-minute transfers trigger penalties during the 5-year look-back period. Late planning provides fewer options and less protection.

“My spouse will be left with nothing”

Reality: Spousal impoverishment protections allow the community spouse to retain significant assets and income when properly utilized.

“I can hide assets from Medicaid”

Reality: Failing to disclose assets is fraudulent and illegal. All planning should be done through legal means with proper disclosure.

State-Specific Considerations

Medicaid rules vary significantly by state. Key differences include:

• Income cap states vs. spend-down states
• Spousal resource allowances
• Treatment of retirement accounts
• Availability of specific planning tools (like Lady Bird deeds)
• Aggressiveness of estate recovery programs

Always consult with an elder law attorney familiar with your state’s specific rules and procedures.

Final Thoughts: The Importance of Professional Guidance

Elder law and Medicaid planning are complex areas that require precision and timing. Missteps can be costly, resulting in delays in care or asset forfeiture. Working with a qualified elder law attorney ensures that your strategies comply with federal and state regulations.

Whether you’re planning for yourself or helping an aging parent, the time to act is now. With proper planning, you can protect what matters most and secure a dignified future.

Need help protecting your family’s legacy? Reach out to Eldersmart – your local elder law attorney today to discuss your options.