Millions of family caregivers are struggling financially to provide unpaid care to our aging family members. This is care that would otherwise cost $60,000 to $100,000 or more per year if it were provided by an assisted living facility, nursing home, or professional in-home caregiver. Unless the person we care for qualifies for Medicaid. 

A joint federal and state program, Medicaid can cover long term care costs for eligible aging adults. And that covered care can be provided in a nursing home or in a home or community-based setting. So how do we know if the person we care for is eligible? 

Medicaid eligibility is based mainly on the applicant’s financial situation. If their income and assets come in at or below the strict limits set by their state Medicaid program, they may be eligible to receive long term care at no or very low cost. If not, they’ll have to “spend down” their income and assets on healthcare until they meet those strict limits. This means they won’t have anything left to leave to loved ones after they pass.

The good news is, there are ways your aging loved ones can protect their assets prior to applying for Medicaid. It just takes some planning.

What are Medicaid’s Income and Asset Limits?

Each state Medicaid program sets its own income and asset limits. But typically, a Medicaid recipient may have up to $2,000 in assets and an income up to twice the federal poverty level. The federal poverty level for one person in 2025 is $15,650/year. So that’s a max annual income of about $31,300 to qualify for Medicaid. 

Assets can include bank and investment accounts, second homes, second cars, boats, etc. The good news: the following assets are usually excluded from the total:

• the home the applicant lives in (up to a certain value)
• personal household property
• one car 
• certain types of life insurance policies 

We can check with the state Medicaid program where the person we care for lives to find the exact income and asset limits that apply to them.

What If the Person I Care for Has Too Much Money?

If our loved one’s nest egg is too big for Medicaid, but too small to foot the bill for professional long-term care, they’re stuck in “The Missing Middle.” It's a classic case of being "too rich to be poor, and too poor to be rich." 

But this doesn’t mean they’re totally out of luck. They can "spend down" their assets and income until they meet the Medicaid limits. What does this mean? It means they have to strategically spend their assets and income on approved medical expenses, gradually bringing their resources in line with Medicaid limits. 

These expenses include things like:

• health insurance premiums, copays, and deductibles
• prescription drugs
• lab work
• durable medical equipment
• doctor's visits
• hospital bills
• transportation costs to and from your healthcare provider
• therapy and home care
• nursing home care
• health-related home renovations

Once they hit the magic income and asset level, they can qualify for long term care benefits through Medicaid. Unfortunately, by then most of their savings will be gone. 

But if we plan well and time it right, they may be able to avoid the Medicaid spend-down prior to qualifying for benefits. 

Understanding the Medicaid Five-Year Look-Back

As we plan to protect our loved one’s income and assets from Medicaid, timing is everything. Here’s why:

Medicaid looks through all financial activity during the five-year period leading up to the day a person applies for Medicaid. This is called the five-year look-back. They’re looking for asset transfers that break look-back rules. And these include transfers made by the applicant’s spouse. If they find anything amiss, they’ll slap a penalty period on the applicant. That means the applicant will receive no Medicaid coverage during the penalty period.

How Long does a Look-back Penalty Period Last?

The length of the penalty period depends on two things:

• the value of assets transferred during the look-back period 
• the average cost of long-term care in the area where the person we care for lives

Medicaid looks at the total value of transferred assets and divides it by the average monthly cost of local nursing home care.

For example, if the person we care for transfers $60,000 worth of assets during the look-back period, and nursing home care in their area costs $120,000 per year, their penalty period would be six months. Because they could have paid for nursing home care for six months using those transferred funds.

If they can recover the transferred assets, Medicaid may adjust or eliminate the penalty period. For instance, if my mom had gifted me a total of $60,000 during the look-back period to put toward my children’s college tuition, but I returned the $60,000 to my Mom, Medicaid might waive or reduce the penalty. However, my mom would need to spend that $60,000 on eligible healthcare expenses.

Does Every State Medicaid Program Have a Five-Year Look-Back Rule?

New York state’s Medicaid program has a five-year look-back for benefits covering care provided in a nursing home. But currently, there is no look-back for care delivered in home- or community-based settings. That won’t last for long though. At some point in 2025, New York Medicaid will implement a 30-month look-back period for home and community based care. 

California’s Medicaid program (MediCal) is just the opposite. Currently it requires a 30-month look back for care provided in a nursing facility, home, or community-base setting. But they plan to phase out the look-back period completely by July of 2026. 

All other states use the five-year look-back rule.

What Breaks the Medicaid Look-Back Rule?

• Money gifted to a relative or friend for any reason
• Real estate transferred to a relative or friend
• Something sold for below its fair market value
• A vehicle donated to a charity  
• Payments made to a personal care assistant without a formal Personal Care Agreement in place
• Assets moved into an irrevocable trust
• Assets moved into a life estate
• Money inherited during or after the look-back and given to others

Strategies for Protecting Income and Assets from the Medicaid Spend-Down

Planning for Medicaid eligibility doesn’t have to feel daunting. With the right approach, we can confidently safeguard our loved one’s income and assets while preparing for their future care needs. By getting started early—ideally at least five years before Medicaid may be needed—we can open up a range of effective strategies that help preserve their estate.

Let’s say our loved one has a long-term care insurance policy that covers four years of care. We’d want to implement at least one of these strategies one year before those benefits begin. The challenge is predicting when those benefits will be needed. 

If we wait until the long term care policy kicks in, our loved one will have to pay for a year’s worth of care out of pocket before qualifying for Medicaid. So starting sooner than we think we need to is wise. Working with an elder law attorney or Medicaid planning expert while your loved one is healthy and able to participate in decisions can help them feel heard and empowered during the planning process.

Here are four proven strategies to protect income and assets from the Medicaid spend-down:

Strategic Gifting

The person we care for can take advantage of annual tax-free gifting (up to $18,000 per recipient) to gradually reduce assets. For example, giving cash gifts or transferring assets to family members or charities—more than five years before the Medicaid application—can be a meaningful way to share resources and avoid penalties. Some states offer small exemptions. For example, Pennsylvanians may gift as much as $500/month without incurring a look-back penalty. So it’s smart to check with your state’s rules.

Medicaid Asset Protection Trust

Transferring assets into an irrevocable Medicaid Asset Protection Trust is a powerful way to shield them from Medicaid calculations. Once assets are in the trust, they’re no longer counted as part of our loved one’s estate. And after their passing, the assets may be distributed to beneficiaries. Setting up a trust more than five years before applying for Medicaid is key, and professional guidance ensures the trust is structured for maximum benefit.

Life Estate Arrangements

A life estate lets our loved one transfer property into joint ownership, so that after their passing, the co-owner receives full ownership. This can be an excellent solution for protecting a home that exceeds Medicaid’s asset limits. Like trusts and gifting, it must be established outside the five-year look-back window.

Medicaid Exempt Annuities

For those needing to reduce assets within the look-back period, a Medicaid Exempt Annuity can be a game-changer. By converting a lump sum into a stream of monthly payments, our loved one can “spend down” excess assets while maintaining income for themselves or a spouse. These annuities are especially useful if our family member suddenly needs long term care and/or if they hope to continue providing for a healthy spouse. In most cases, the state Medicaid agency must be named as the primary beneficiary for any funds remaining after the owner's death. Rules vary by state. Some annuities aren’t Medicaid exempt. And most tend to be pricey. So expert advice is essential.

With thoughtful planning and expert support, we can navigate Medicaid’s rules with confidence and ensure our loved one’s financial security and peace of mind for the future.

Other Medicaid Spend-down Tips

Beyond healthcare expenses, several other types of spending are allowed without triggering Medicaid’s look-back penalties. The key is to keep thorough, organized records of every transaction. A simple spreadsheet can make tracking bills and expenditures a breeze, whether payments come from our loved one’s account or our own. For added peace of mind, we can snap photos of receipts and store them in a secure cloud service like Dropbox or iCloud. This way, we’ll always have documentation at our fingertips.

Personal Care Agreement

I mentioned this briefly earlier. Here are the details. A personal care agreement is a tool that can bring clarity, security, and peace of mind to families navigating the caregiving journey. With guidance from an elder law attorney, we can create this legally binding contract to ensure everyone is on the same page in terms of the care that’s needed and the compensation that will be provided to the family member or friend entrusted to provide that care. 

Through a personal care agreement, the care recipient—or their family—formally agrees to pay a family member or another trusted individual for providing essential care. This agreement spells out the caregiver’s duties, sets expectations for services like personal care, transportation, and household help, and details the compensation, which should align with the local market rate for similar professional care. 

Payments can only be made for care provided after the agreement is signed. And these payments count as legitimate care expenses. This means the payments can be used as part of a Medicaid spend-down strategy without violating Medicaid’s look-back rules. 

Pay Off Debt

If the person we care for has debts such as mortgages, credit cards, or other loans, paying them off is an acceptable way to spend down their assets without violating look-back rules.

Home Modifications

Paying to install wheelchair ramps, bathroom safety renovations, or other accessibility improvements will not violate look-back rules. 

Prepaid Funeral Arrangements

The person we care for can fund an irrevocable funeral trust to help ensure their funeral expenses are covered. This type of trust is not included in the five-year look-back. 

Exempt Assets

Recall that a primary residence or vehicle is exempt from the look-back rule. So another spend-down strategy is to purchase one of these exempt assets. 

Spousal Impoverishment Protections

If only one of our parents needs long-term care, Medicaid allows certain asset transfers and protections to ensure the non-institutionalized parent (a.k.a. the community spouse) does not fall into poverty. The community spouse may keep a portion of the couple’s countable assets, known as the Community Spouse Resource Allowance (CSRA). These include:

• Checking and savings accounts
• Certificates of deposit (CDs)
• Stocks, bonds, and mutual funds
• Cash value of life insurance policies
• IRAs and other retirement accounts (depending on state rules)
• Revocable trusts

As of 2025, the CSRA ranges from $31,584 to $157,920, depending on the state. Our parent in need of long-term care must generally "spend down" any amount above the CSRA before they can qualify for Medicaid.

Certain assets are not counted toward Medicaid eligibility and can remain with the community spouse:

• The primary residence (as long as the community spouse lives there)
• One vehicle
• Household goods and personal belongings
• Irrevocable funeral trusts (up to state-specific limits)
• Items that assist with daily living, such as medical equipment

Pooled Income Trusts

If our family member is disabled, a pooled income trust (a.k.a. pooled special needs trust), allows their excess income to be managed by a non-profit. The funds can then be used to pay for their living expenses and supplemental needs. This helps them meet Medicaid’s strict income and asset limits without losing eligibility. 

However these trusts aren’t available in all states. And in states where they are permitted, there may be additional restrictions, such as age limits (often under 65), disability requirements, or specific rules about what expenses the trust can cover. It’s wise to consult a Local Elder Law or Medicaid Planning Attorney to learn about the availability and rules for pooled income trusts in the state where the person we care for lives. 

Long-Term Care Insurance

If an aging parent has enough assets, and is in good enough health, purchasing a long-term care insurance (LTCI) policy could keep them from ever having to apply for Medicaid in the first place. Or it could put off their application for a couple of years, buying us more time to help them get their financial affairs in order before applying. LTCI can help pay for care provided at home or in a facility. And some policies even pay a family member to provide care at home. 

Planning Financially for Medicaid is…a Lot

Setting up trusts, working with attorneys and accountants, and buying annuities or LTCI policies takes time, money, and a fair amount of emotional energy. So all of this may feel a little overwhelming. That’s okay. Take a breath. And explore them one by one to understand which strategies sound most appealing and beneficial. Here’s a quick cheat sheet to refer to:

Asset Protection Strategies

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Remember: the goal is to help our loved one protect the assets that they worked hard to secure and hope to pass down to family. 

The key? Start early. The more involved our loved one is in the planning, the more confidence they’ll have that their wishes will be carried out. Because Medicaid rules vary from state to state, it’s smart to team up with a Medicaid planning expert, elder law attorney, or financial advisor who practices in our family member’s state. They’ll help us navigate the process smoothly and avoid costly mistakes.

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