How to Protect Your Money From Medicaid: Trusts, Annuities, and Timing

You can protect your money from Medicaid, but only by planning within federal rules that assume you’ll try. The core strategies are moving assets into an irrevocable trust, deeding your home with a retained life estate, making use of transfers the law specifically exempts, taking advantage of spousal protections if you’re married, and (when time has run out) buying a Medicaid-compliant annuity or paying a family member under a formal care contract. Almost all of it depends on one number: 60 months. Federal law lets states look back five full years at every asset you moved before you applied, so most of what works has to happen well before you need care. Private-pay nursing home costs run anywhere from roughly $6,000 to more than $15,000 a month, which is why the planning matters and why sloppy planning is worse than none.

What follows is the map. The execution belongs to an elder law attorney in your state, because every rule below has state-level variations that change the answer.

The Number You’re Planning Against

Medicaid long-term care eligibility rides on the Supplemental Security Income resource rules. For an individual applicant, countable assets generally cannot exceed $2,000. Countable means bank accounts, investment accounts, cash, stocks, bonds, and most other property that can be converted to cash. Married couples where one spouse needs care are handled under a separate calculation covered further down.

Income matters too. In “income cap” states, your monthly income cannot exceed 300 percent of the SSI federal benefit rate. For 2026, that rate is $994, putting the cap at $2,982. If your income is higher, a Qualified Income Trust can hold the excess so it doesn’t count. Other states use a “medically needy” or spend-down approach, where medical expenses reduce your effective income to the state’s threshold.

The Five-Year Look-Back and Why Timing Is Everything

Federal law requires states to examine every asset transfer you made for less than fair market value during the 60 months before your Medicaid application.¹ “Less than fair market value” covers gifts, below-market sales, and most transfers into trust arrangements without equivalent value coming back to you.

When the state finds a disqualifying transfer, it imposes a penalty period during which Medicaid will not pay for your long-term care. The length of the penalty equals the total uncompensated value of the flagged transfers divided by the average monthly nursing home cost in your state. Give away $300,000 in a state where the average monthly cost is $10,000, and you face a 30-month penalty. During that penalty, you pay the nursing home yourself. Poorly timed gifting destroys families financially at exactly this point: the money is gone, Medicaid won’t pay, and the bill is still due every month.

One detail catches people out. The look-back clock starts on the date of each transfer, but the penalty period doesn’t begin until you actually apply for Medicaid and would otherwise be eligible. You can’t apply early to burn off a penalty while you still hold too many assets.

Assets Medicaid Already Ignores

Before you move anything, know what already doesn’t count. These exemptions are the first, cheapest layer of protection.

Your primary residence, as long as your equity stays under the state’s threshold. For 2026, states set that limit somewhere between $752,000 and $1,130,000. The home exemption generally requires that you intend to return home, or that a spouse, minor child, or disabled child still lives there. If you’re permanently institutionalized with no protected relative in the home, the exemption may fall away.²
One vehicle used for transportation by you or a household member.
Household furniture, clothing, and personal effects.
Irrevocable prepaid funeral plans and a designated burial fund.
Life insurance with a total face value of $1,500 or less. Above that, the cash surrender value becomes countable.

The home is the biggest exempt asset most people own and also the most exposed to Medicaid estate recovery after death. Living in it isn’t the whole strategy; keeping it in the family usually takes an additional step.

Transfers That Never Trigger a Penalty

Federal law lists several transfers that are exempt from the look-back entirely. Made correctly and documented properly, they never create a penalty, no matter when they happen.¹

Transfers to a spouse, at any time, for any amount. This is the broadest exemption, though it only shifts assets within the couple.
Transfers to a child who is blind or permanently disabled under Social Security standards, regardless of the child’s age.
Transfer of your home to an adult child who lived with you for at least two years immediately before you entered a nursing home and whose care delayed your institutional placement. Proving this takes doctor’s letters, utility bills, tax returns showing the same address, and medical documentation.
Transfer of your home to a sibling who has an ownership interest and lived there continuously for at least one year before you were institutionalized.
Transfers into a trust for the sole benefit of a disabled person under 65, when the trust meets federal requirements.

These exceptions are powerful, but they’re narrow, and the paperwork needs to be built well before you apply, not scrambled together afterward.

Irrevocable Medicaid Asset Protection Trusts

If you have more than five years of runway, an irrevocable Medicaid asset protection trust is the most commonly used tool. You transfer assets into a trust you no longer control. Once the 60-month look-back passes, those assets are no longer countable for eligibility.

The mechanics matter. Federal law counts any portion of a trust from which payments could be made to you or for your benefit as your resource. Only portions from which you cannot receive anything under any circumstances are treated as transferred and subject to the look-back.¹ So the trust has to be drafted so that principal cannot come back to you. If the trustee has discretion to send it your way, Medicaid counts it.

The tradeoff is genuine. You lose control. You typically can’t sell the property, change beneficiaries, or reach the funds without going through the trustee, and the trustee is bound by the document. Some trusts let the grantor keep income the trust assets generate, such as rental income, but that income counts toward Medicaid eligibility. The trust also becomes its own tax entity and may need to file Form 1041 annually if it earns $600 or more in gross income.

And there is no partial credit. If you enter care within five years of funding the trust, the full value you transferred is a penalized transfer. Four years in doesn’t count for anything. The whole look-back has to run.

Life Estate Deeds

A life estate deed transfers ownership of your home to someone else (usually your children) while you keep the legal right to live there for life. You hold the life estate, they hold the remainder interest. At your death, the property passes to them automatically, outside probate, which in many states also keeps it out of Medicaid estate recovery.

Creating the deed is a transfer for less than fair market value, so the look-back applies. But because you kept the life estate, only the value of the remainder interest is transferred, not the whole property. IRS actuarial tables set that percentage based on your age at the transfer. A 75-year-old transfers a smaller taxable amount than a 65-year-old, because the older person’s retained life estate is worth less.

The risks are real. Selling later requires everyone to agree, and the proceeds split between life estate and remainder interests according to those same actuarial values. States define “estate” differently for recovery purposes, and some reach interests passing through life estate arrangements. This strategy fits best when you’re confident you won’t need to sell and you have more than five years before care.

Protections for a Married Couple

Federal spousal impoverishment rules exist so the healthy spouse doesn’t lose everything when their husband or wife enters a nursing home.³ Two allowances do most of the work.

The Community Spouse Resource Allowance (CSRA) protects a share of the couple’s combined countable assets for the spouse still at home. For 2026, that share falls between $32,532 and $162,660, depending on total resources. The general rule is that the community spouse keeps half the combined assets at the time of the institutionalized spouse’s admission, floored at the minimum and capped at the maximum.²

The Minimum Monthly Maintenance Needs Allowance (MMMNA) protects the community spouse’s income. If their own monthly income falls below the MMMNA, some of the institutionalized spouse’s income can be diverted to bring them up. For 2026 the figure is $2,643.75 in most states, with a maximum of $4,066.50.² Alaska and Hawaii use slightly higher numbers.

When a couple’s assets exceed the CSRA maximum, the excess has to be spent down before the institutionalized spouse qualifies. Combining the spousal rules with the annuity strategy below can eliminate that excess immediately instead of dragging out a slow spend-down.

Medicaid-Compliant Annuities for Crisis Situations

A Medicaid-compliant annuity converts a lump sum of countable assets into an income stream, typically paid to the community spouse. Turning assets into income drops the institutionalized spouse’s countable resources at the moment of purchase, which is why this is a crisis tool: it works even when you don’t have five years to spare.

The requirements come from the Deficit Reduction Act of 2005 and are strict. The annuity must be irrevocable, non-assignable, and actuarially sound, meaning the payout period cannot exceed the purchaser’s life expectancy. Payments have to be equal, with no deferral or balloon features. The state must be named as the primary remainder beneficiary up to the total Medicaid benefits paid on behalf of the institutionalized spouse, or as secondary beneficiary if there’s a community spouse or a minor or disabled child.¹

These annuities aren’t investments. Returns are modest, the lump sum is gone for good, and the value is purely strategic: they clear countable assets off the books on the day of purchase.

Personal Care Contracts

A personal care contract, sometimes called a caregiver agreement, lets you pay a family member for care at fair market value. Because you’re paying for services actually rendered, it isn’t a gift and shouldn’t trigger a look-back penalty.

Execution is where these succeed or fail. The contract has to be written, signed before services begin, and never retroactive. It has to specify which services the caregiver provides, the hourly or weekly rate, the payment schedule, and the expected duration. The rate has to match what a professional in your area would charge for the same work. Medicaid scrutinizes these contracts. Paying $50 an hour for light housekeeping in a market where home aides earn $18 will be treated as a disguised gift.

The caregiver has to report the income on their taxes. Handled properly, the contract does two useful things at once: it spends down countable assets legitimately and it compensates a family member who might otherwise work for free. Have an attorney review the contract before the first payment.

Retirement Accounts

How Medicaid treats IRAs and 401(k)s varies enough by state that generic advice is dangerous. The common pattern is that retirement accounts in “payout status” (regular distributions coming out) are treated as income rather than as countable assets. Accounts not in payout status are more likely to be counted as available resources.

For an applicant’s own retirement account, putting it into payout status before applying can shift it from the asset column to the income column. But those distributions then count as income, which can push you over the cap in income-cap states. A Qualified Income Trust can absorb the excess.

Required minimum distributions matter here. Traditional IRAs and 401(k)s force annual withdrawals starting at age 73 under the SECURE Act 2.0, and those distributions count as income for Medicaid. Roth IRAs don’t require distributions during the owner’s lifetime, which can help from a Medicaid standpoint. Converting a traditional account to a Roth years ahead can work, but the conversion triggers income tax on the amount converted.

For married couples, the community spouse’s retirement accounts are generally protected under spousal impoverishment rules. Whether the institutionalized spouse’s account counts as an asset or an income stream depends on state law, and states diverge sharply.

The Tax Cost of Transferring Assets

Every Medicaid-motivated transfer has a potential tax price attached, and sometimes that price eats the savings.

The big trap is basis. Property you give away during your lifetime carries your original cost basis to the recipient (carryover basis).⁴ Buy a home for $80,000, transfer it to your children when it’s worth $400,000, and their tax basis stays at $80,000. Selling it triggers capital gains tax on $320,000 of gain. Had you kept the home until death, they’d have received a stepped-up basis equal to fair market value at your death, potentially wiping out the capital gains tax.⁵

For a home that hasn’t appreciated much, the basis penalty is small. For decades of appreciation, it can be enormous. A good elder law attorney weighs Medicaid savings against the tax cost before pushing a transfer.

Gifts also carry federal gift tax reporting. For 2026, the annual exclusion is $19,000 per recipient.⁶ Larger gifts require Form 709, though most people won’t owe gift tax because the lifetime exemption is high. Important boundary: staying under the gift tax exclusion does nothing for Medicaid. Any gift within the look-back creates a penalty regardless of size. The IRS and Medicaid treat gifts under separate rules.

Medicaid Estate Recovery

Qualifying for Medicaid isn’t the end of the story. Federal law requires every state to seek repayment of long-term care costs from the estates of recipients who were 55 or older when they received benefits.¹ At minimum, states must recover for nursing facility services, home and community-based services, and related hospital and prescription drug charges. States may extend recovery to all Medicaid services.⁷

What’s in the “estate” varies. Some states limit recovery to probate assets, meaning property titled solely in the deceased’s name. Others use an expanded definition reaching jointly held property, life estate interests, and assets in certain trusts. This is why the life estate strategy works better in some states than others, and why an attorney’s local knowledge matters.

Federal law blocks recovery in three situations: a surviving spouse, a surviving child under 21, or a surviving child who is blind or permanently disabled.⁷ Recovery is deferred while a surviving spouse is alive, then can be pursued against that spouse’s estate. Every state also has to offer a hardship waiver process, most commonly for heirs whose homestead or income-producing property (like a family farm) would otherwise be lost. If recovery threatens property you rely on, file the waiver.

One less-known point: states can also place a lien on your real property while you’re still alive, if you’re permanently institutionalized and not reasonably expected to return home.⁸ These liens cannot be imposed when a spouse, minor child, or disabled child lives in the home, and they must be dissolved if you return.

Start Before You Need To

The single biggest mistake in Medicaid asset protection is waiting. The five-year look-back means the strategies that keep the most money (irrevocable trusts, life estate deeds, direct gifts) all need runway. Crisis tools like compliant annuities and personal care contracts exist for people who ran out of time, but the options narrow and the cost climbs.

State variation is the other reason to get help. Asset limits, income cap versus medically needy rules, home equity thresholds, estate recovery definitions, and the penalty divisor all shift across state lines. An elder law attorney in your state can match the strategy to your situation, produce documentation Medicaid will accept, and coordinate the tax side with your financial advisor. A few thousand dollars of legal work costs less than one month of private-pay care, and it costs a fraction of what a botched transfer costs.

1
Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
2
Centers for Medicare & Medicaid Services. 2026 SSI and Spousal Impoverishment Standards
3
Medicaid.gov. Spousal Impoverishment
4
Office of the Law Revision Counsel. 26 USC 1015 – Basis of Property Acquired by Gifts and Transfers in Trust
5
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
6
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
7
Medicaid.gov. Estate Recovery
8
U.S. Department of Health and Human Services ASPE. Medicaid Liens