What Does Spend-Down Inheritance Mean?

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If you are receiving certain government benefits, such as Supplemental Security Income or Medicaid, your eligibility is means-tested, meaning that you must not exceed a certain level of income or resources to remain eligible. If you receive an inheritance by the terms of a will or trust, you may exceed these eligibility levels. "Spending down" an inheritance means disbursing the money to remain eligible for public assistance. Inheritances do not affect your eligibility for Social Security retirement benefits or Social Security Disability, not to be confused with the Supplemental Security Income program.

SSI Benefits

The Social Security Administration operates the Supplemental Security Income program for persons who are disabled and unable to work, and who have very limited income and resources. The SSI resource limits as of 2012 were $2,000 for a single beneficiary and $3,000 for married couples. Collecting an inheritance valued above these amounts would end your eligibility for SSI benefits and Medicaid, which usually go together. Social Security rules require you to declare significant changes to your resources, including an inheritance. The agency will count money as well as certain forms of property, including homes, land, cars, and jewelry. But generally, the home in which you live and one car that is necessary for transportation are excluded from the means test.

Medicaid Eligibility

The Medicaid program is funded jointly by state and federal funds which are administered by the states according to their own rules and guidelines. Income, including an inheritance is counted in the month you receive it, so if you properly spend the inheritance before the end of the month, it will not be counted in the following month as an asset. However, if you inherit property or improperly dispose of a cash inheritance, you may still exceed the asset limits placed on Medicaid recipients.

Read More: Eligibility Under the Pickle Amendment

Nursing Home Care

In addition to SSI, Medicaid is also an important source of funds for seniors planning to enter nursing homes. Federal guidelines set out minimum allowable assets for eligibility, but states often have their own rules. The federal government mandates a "look-back" period of five years, so eligibility for nursing home care is affected if you have gifted any portion of an inheritance -- cash, investments, valuables or real estate -- to a relative or spouse during this period.

Individual states may be more lenient; for example, the MassHealth (Medicaid) program in Massachusetts allows applicants to freely transfer a home to a spouse, a child under 21, a sibling who was living in the home for at least a year or a child who was caring for an elder parent at least two years before the parent entered a nursing home. Many states make exceptions for property transferred to your spouse, and exempt a portion of assets held jointly.

Spend-Down Strategies

In some cases, inheritances may be preserved without completely losing the use of the money, yet still remaining eligible for public assistance programs. Depending on the laws of your state, you may remain eligible for Medicaid by gifting all or part of the inheritance to a special-needs trust, meant to assist you or someone else with medical expenses. You may also place the funds in an irrevocable trust, the terms of which you cannot change once the trust is legally created and funded. A funeral contract that covers future expenses for the benefit of your relatives, may be a proper use of an inheritance. If you are expecting an inheritance that may affect your eligibility for Medicaid or SSI, it's a good idea to consult an experienced attorney or financial adviser to guide you through the complex issues.

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