Written by Julie B. Kennedy, CEO & Co-Founder, RubyWell

The high cost of assisted living, professional in-home care, and nursing home care has put these services out of reach for many aging adults who need them. So they’re depending on unpaid family members to provide their care when they can no longer manage their own activities of daily living. But too many family caregivers are struggling financially because of this.

On average, family caregivers spend over $7,000/year out of pocket on caregiving costs. And 40% of them have to leave their jobs to provide care, forfeiting income, 401(k) contributions, and social security contributions.

When the financial, physical, or emotional demands of caregiving grow too difficult to manage, Medicaid can come to the rescue, covering long term care costs—provided in a nursing home or in a home- or community-based setting—for eligible aging adults. That eligibility is largely based on the income and assets of the applicant. If they don’t meet the strict income and asset limits set forth by their state Medicaid program, they won’t be able to take advantage of this safety net.

What Are the Income and Asset Limits for Medicaid Eligibility?

Medicaid income and asset limits vary by state. But generally speaking, a Medicaid recipient may have no more than $2,000 in assets and income that’s less than twice the federal poverty level. In 2024, the federal poverty level is $15,060/year for one person. So an annual income of no more than about $30,000 is required.

Now, not all assets are included in the asset limit. The applicant’s primary residence (up to a certain value), personal household property, and one car are usually excluded, as are certain types of life insurance policies. But any investments or bank accounts, second homes or cars, boats, etc. are included.

Again, check with your state Medicaid program to find the exact income and asset limits and eligibility requirements for your loved one’s state.

What If My Loved One Has Too Much Money to Qualify for Medicaid?

Many aging adults have income and assets above the Medicaid limits, but they don’t have enough money to pay for long term care out of pocket. They’re stuck in the Missing Middle. One family caregiver we interviewed at RubyWell summed up life in the Missing Middle simply: “We’re too rich to be poor, and too poor to be rich.”

Families in this situation have to “spend down” their loved one’s assets and income on qualified medical expenses until they meet the Medicaid limits. Only then can they qualify for long term care benefits through Medicaid. 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

There are ways to avoid the Medicaid spend-down. But timing is everything.

What Is the Medicaid Five-Year Look-Back?

The most important thing to remember when taking action to protect income assets from Medicaid is that Medicaid has a five-year look-back period.

This means that Medicaid will look through all financial activity during the five year period prior to the day a person submits a Medicaid application. Any asset transfers—including those made by the applicant’s spouse—that violate look-back rules will result in a penalty period. During the penalty period, the applicant will not be eligible for Medicaid.

How Long Is a Penalty Period for Breaking a Look-Back Rule?

Medicaid determines the penalty period based on the value of the transferred assets and the cost of long term care in your area.

If the person you care for transfers assets worth $50,000 during the look-back period, and nursing home care in their area averages $100,000/year, their penalty period would be six months—the amount of time they could pay for nursing home care on their own with that $50,000.

If your loved one can recover transferred assets, Medicaid may reconsider the penalty period. For instance, if that $50,000 was given to you during the look-back period to help you make a downpayment on a house you purchased, and you give the $50,000 back to your loved one, the penalty period could be waived or reduced. And that $50,000 would then have to be spent down on healthcare.

Are There Exceptions to the Five-Year Look-Back Rule?

California’s Medicaid program (MediCal) currently requires a 30-month look back, so just 2.5 years instead of 5. And by July of 2026, they will phase out the look-back period altogether.

New York state has a five-year look-back for Medicaid benefits covering care delivered in a nursing home. But they currently have no look-back for care delivered in home- or community-based settings. In 2025, they plan to implement a 30-month look-back period for home and community based care.

What Are the Medicaid Look-Back Rule-Breakers?

• 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

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

Now that you understand the Medicaid look-back rule, you can see that it’s important to plan ahead—at least five years ahead—if you think the person you care for may at some point require Medicaid to cover their long term care costs. So it’s wise to put one or more of these strategies into place sooner rather than later.

For example: if your loved one has a long term care insurance policy that will cover five years of long term care, you’d want to have these strategies in place as close as possible to (if not before) the day they start to receive benefits from that policy.

Ideally, you and your loved one can work with an elder law attorney or Medicaid planning specialist to make these arrangements while your loved one is still healthy, independent, and able to make sound decisions.

Gifted Assets

Some older adults take advantage of tax-free gifting of up to $18,000/year per gift recipient as a way to reduce their assets.

For instance, they may write checks for up to $18,000 to each of their three children every year on their birthdays. Or they may transfer assets like homes or vehicles to friends, family members, or charities. This is fine, as long as it happens more than five years prior to applying to Medicaid. If they do this during the five-year look-back period, they will have to either recover the gifted assets or face a penalty period.

Some states waive the look-back rule for small gifts. For example, Pennsylvania allows Medicaid applicants to gift as much as $500/month without violating Medicaid’s look-back rule.

Irrevocable Trust

The person you care for can transfer assets into an irrevocable trust to protect them from Medicaid spend-down or penalties, as long as they set up the trust more than five years prior to applying for Medicaid. Any assets in the trust must stay in the trust until after your loved one passes away. Then they can be distributed to the trust’s beneficiaries. You’ll want to work with an elder law attorney or Medicaid planning specialist to set up this trust and determine the assets to fund it with.

Life Estate

Your loved one can choose to create a Life Estate, which lets them transfer ownership of real estate from their name to joint ownership with someone else. Then that co-owner will have sole ownership of the real estate when your loved one dies. This works well if the person you care for owns a home that’s worth more than the maximum that’s excluded from the assets that their state Medicaid program considers for eligibility. A Life Estate is also irrevocable and subject to the five-year look-back.

Medicaid Exempt Annuity

This strategy allows the person you care for to reduce their assets during the five-year look-back period. So it’s especially helpful if your loved one suddenly needs long term care.

Here, they would put a lump sum of money into the annuity. That sum is then converted to monthly payments for them or their spouse. So they’re able to “spend down” excess assets without violating Medicaid’s look-back period.

Often Medicaid exempt annuities are used to provide income for a healthy spouse while allowing the other spouse to qualify for Medicaid long-term care. In most cases, the state Medicaid agency must be named as the primary beneficiary for any funds remaining after the owner’s death.

The rules for Medicaid exempt annuities vary by state. Not all annuities are Medicaid exempt. And annuities tend to be expensive. So it’s wise to talk with a Medicaid planning expert before choosing this option.

Other Ways to Spend Down Assets Ahead of Medicaid Application

In addition to spending on healthcare, there are other expenditures that don’t trigger a look-back penalty. Just be sure to keep meticulous records of all financial transactions to show that the  person you care for has complied with Medicaid rules.

AARP suggests using a spreadsheet to track all bills paid and money spent on your loved one’s behalf, whether paid from their bank account or yours. You can also take pictures of receipts and upload them to a cloud service like Dropbox or iCloud so you can easily access them.

Personal Care Agreement

Earlier I mentioned something called a personal care agreement. This is a legally binding document that a family can draw up with the help of an elder law attorney.

In the agreement, the care recipient or other family members agree to pay one or more informal caregivers (a.k.a. family caregivers) to provide care to the aging family member. The document lays out the duties and responsibilities of the caregiver(s) and the compensation that the family will pay.

The compensation should be based on the going rate for professional care where the care recipient lives. And the caregiver can only be compensated for care provided after the agreement is signed.

Once the person you care for has a personal care agreement in place naming you as their caregiver, they can pay you for the care you provide as part of their Medicaid spend-down. These payments will not violate the look-back period rules.

Pay Off Debt

Using excess assets to pay off mortgages, credit cards, or other debts is an acceptable way to spend down without violating look-back rules.

Home Modifications

Investing in home modifications like wheelchair ramps, bathroom safety renovations, or other accessibility improvements will not violate look-back rules.

Prepaid Funeral Arrangements

Setting up an irrevocable funeral trust can help spend down assets while ensuring funeral expenses are covered.

Purchase Exempt Assets

Buying items that don’t count toward Medicaid’s asset limit, such as a new primary residence or vehicle, can be an effective spend-down strategy.

Financial Planning for Medicaid is Complicated

As you can see, if the person you care for is in the Missing Middle, qualifying for long term care benefits through Medicaid can be a complex, challenging—and ironically, expensive—process. Drawing up trusts and legal documents, working with attorneys and accountants on estate planning, and purchasing annuities costs a fair amount of money. But it can protect assets that can then be left to their loved ones to help them recoup costs of caregiving and plan for their own care in the future.

All of this also takes time. So the sooner you start this process the better. And because Medicaid rules vary by state, you should work with a Medicaid planning expert, elder law attorney, or financial planner in your loved one’s state to make sure you follow the state’s rules and avoid any penalties.