Medicaid and Inheritance: Estate Recovery, Spend-Down Rules & Your Options (2026)

Medicaid can intersect with an inheritance in two very different ways — and the stakes are high in both. If your parent was on Medicaid for nursing home care, the state may have a right to recover from their estate before you inherit anything. If you're on Medicaid yourself and you inherit money, you could lose your health coverage unless you act quickly.

Medicaid is means-tested — it's designed for people with limited income and assets. When a significant inheritance enters the picture, it can threaten eligibility, trigger state recovery claims, or significantly reduce what an heir actually receives. Neither outcome is automatic, and both have legal workarounds — but they require knowing the rules and acting fast.

This guide covers both scenarios separately because they involve different rules and different decisions.

Which scenario applies to you?

Your parent (or grandparent) was on Medicaid long-term care when they died: The state may file an estate recovery claim. Read Scenario 1: Medicaid Estate Recovery.
You are currently on Medicaid and you just inherited money: You may be at risk of losing Medicaid eligibility. Read Scenario 2: Inheriting While on Medicaid.

Scenario 1: Your Parent Was on Medicaid — Medicaid Estate Recovery (MERP)

If your parent received Medicaid benefits for nursing home care, home and community-based services, or related hospital and prescription drug costs after age 55, federal law requires the state to try to recover those costs from their estate.¹ This is the Medicaid Estate Recovery Program — MERP.

MERP doesn't mean you owe the state money personally. It means the state files a claim against the estate — the assets that go through probate — before those assets are distributed to heirs. If the estate has value, the state gets paid first, just like a creditor.

What assets are subject to MERP?

It depends heavily on your state. Federal law requires recovery from the "estate" — but states define "estate" differently:

Probate-only states: Recovery is limited to assets that pass through probate — property in the decedent's name alone, without a beneficiary designation, TOD/POD designation, or joint tenancy. IRAs, life insurance, and accounts with named beneficiaries are typically not subject to MERP in these states.
Expanded-definition states: Many states define "estate" broadly to include non-probate transfers — joint tenancy property, trusts, and in some cases IRAs. In these states, MERP can reach a much larger portion of the estate.

The family home is the most common MERP target. In many cases, the home passed to Medicaid planning strategies that failed, or no planning was done at all, and the home is the primary probate asset. MERP can place a lien on real property or simply file a claim against the estate.

Who is protected from MERP?

Federal law prohibits estate recovery while any of the following are alive:²

Surviving spouse — recovery is completely deferred until the surviving spouse also dies
Child under age 21
Blind or permanently disabled child of any age (as defined under SSI rules)

These are absolute protections: if any of these relatives survive the Medicaid recipient, the state must wait — and in practice, the surviving spouse protection often means MERP claims never materialize (the surviving spouse lives out their life, and by the time they die, other planning may have occurred).

Hardship waivers

Every state is required by federal law to establish a hardship waiver process. Common hardship grounds include:

The property is the only income-producing asset of the heir and the heir's income is below a threshold
The heir would be forced into poverty if recovery is pursued
The property is a family farm that would need to be sold to satisfy the claim

Hardship waivers are not automatic — you must apply, typically within a state-specified deadline (often 30-60 days after you receive the recovery notice). Missing the deadline can forfeit your right to appeal.

How much can the state recover?

The state can recover the actual dollar amount it paid in Medicaid costs — nursing home care at roughly $7,000–$12,000/month means a 3-year Medicaid stay could generate $250,000–$430,000 in state costs. However, recovery is limited to the value of the probate estate: if the estate has only $150,000 in probate assets and the Medicaid debt was $350,000, the state recovers $150,000 and writes off the rest.

What heirs should do when a parent was on Medicaid

Steps when a Medicaid recipient dies:

Request the Medicaid recipient's payment history from the state Medicaid agency — know the dollar amount the state may try to recover before assuming the estate is yours to inherit
Identify which assets in the estate pass through probate vs. pass by beneficiary designation, joint tenancy, or trust — non-probate assets are often shielded in probate-only states
Check for surviving spouse, minor child, or disabled child protections that would defer or eliminate the claim
File for a hardship waiver if applicable — get legal help; deadlines are short
Consult an elder law attorney before distributing anything from the estate — distributing assets before the MERP claim is resolved can create personal liability for the executor

Key point for inherited real estate: If the home is in the probate estate and the parent was on Medicaid, do not transfer the property or proceed with a sale without understanding the MERP claim first. The state may already have a lien recorded against the property.

Scenario 2: You Are on Medicaid and You Inherit Money

If you currently receive Medicaid (or SSI, which uses Medicaid) and you inherit money or assets, you are required to report the inheritance to your state Medicaid agency — typically within 10 days, though the deadline varies by state. Failing to report is treated as fraud.

The core problem: Medicaid has strict asset limits. In most states, a single person can have no more than $2,000 in countable assets and remain eligible. An inheritance of $100,000 or more would immediately disqualify you unless you take action.

What assets count toward the Medicaid limit?

Countable assets include cash, bank accounts, investments, and most property. Exempt (non-countable) assets typically include:

Your primary residence (while you live in it)
One vehicle
Personal property and household goods
Burial funds up to your state's limit
Assets held in a qualifying Special Needs Trust
ABLE account balances up to $100,000 (SSI rule; Medicaid varies by state)

Option 1: Disclaim the inheritance

A qualified disclaimer under IRC §2518 lets you legally refuse an inheritance — the assets pass directly to the next beneficiary as if you predeceased the decedent. If you disclaim properly, the inheritance is never legally "yours" and cannot disqualify you from Medicaid.

The deadline is strict: the disclaimer must be filed within 9 months of the date of death. You also cannot have accepted any benefit from the inheritance before disclaiming. If you've already received or spent any of the funds, disclaimer is no longer available.

When to consider this: If you need Medicaid more than you need the inheritance — for example, if you depend on Medicaid for ongoing long-term care that would otherwise cost more than the inheritance. Disclaiming to protect benefits can make sense; but if the inheritance is large relative to the cost of care, the math often favors keeping the money and using a Special Needs Trust instead.

Option 2: Special Needs Trust (SNT)

A Special Needs Trust holds assets for the benefit of a person with disabilities without counting those assets toward Medicaid's asset limit. If you are under age 65 and qualify as disabled under SSI/Medicaid rules, an attorney can establish a first-party (self-settled) Special Needs Trust under 42 U.S.C. §1396p(d)(4)(A) — funded with your inheritance — that lets you keep the money while maintaining Medicaid eligibility.³

Important conditions for a first-party SNT:

Must be established before age 65
Must be for the sole benefit of the disabled individual
Must include a Medicaid payback clause: upon the beneficiary's death, Medicaid receives reimbursement from any remaining trust assets before they pass to other heirs
A trustee — usually a family member, attorney, or corporate trustee — manages distributions

A pooled trust (42 U.S.C. §1396p(d)(4)(C)) is an alternative for smaller amounts — it's administered by a nonprofit organization and can be established at any age, though Medicaid payback still applies to the state's share at death.

When to use an SNT: When the inheritance is significant and you need ongoing Medicaid coverage (particularly for long-term care, which costs far more than most inheritors can cover themselves). An SNT preserves the money for supplemental needs while protecting Medicaid eligibility.

Option 3: ABLE account

If you have a disability that began before age 46 (expanded from age 26 by the ABLE Age Adjustment Act, effective January 2026⁴), you may be eligible for an ABLE account — a tax-advantaged savings account under IRC §529A that does not count toward Medicaid asset limits (up to a state-specific cap).

In 2026, you can contribute up to $20,000 per year to an ABLE account from any source.⁵ If you're employed and don't participate in an employer retirement plan, you can contribute an additional amount up to your earned income.

ABLE accounts work best for smaller inheritances or as a complement to an SNT. A $200,000 inheritance cannot be sheltered in an ABLE account immediately — at $20,000/year, it would take 10 years to fully deposit it, and the excess would still disqualify you during that period.

Option 4: Spend down on exempt assets

You may spend inherited money on exempt assets without losing Medicaid — for example, paying off debt, buying a vehicle, making home improvements to your primary residence, or prepaying funeral and burial expenses within your state's limit. This "spend-down" approach works if the inheritance is relatively small and you have genuine exempt needs, but it permanently depletes the inheritance rather than preserving it.

Timeline matters

Most states require you to report an inheritance within 10 days. If you exceed the asset limit, you typically have a short window — sometimes as little as one month — before Medicaid terminates. An elder law attorney can help you move assets into an SNT or ABLE account quickly enough to preserve coverage. Do not delay.

Why a specialist matters in both scenarios

MERP and Medicaid spend-down involve federal law, state-specific rules, strict deadlines, and significant dollar amounts. The decisions are highly situation-specific:

Is the home subject to a recorded Medicaid lien or just an estate claim?
Does your state use the expanded or probate-only definition of "estate"?
Does a surviving spouse or disabled sibling create a protected-heir exemption?
Is a first-party SNT or pooled trust more appropriate given the amount and your age?
How much of the inheritance can be sheltered in an ABLE account vs. spent-down vs. placed in trust?

A fee-only financial advisor who works alongside an elder law attorney is the right team here. The financial advisor handles tax implications and investment of trust or ABLE assets; the elder law attorney sets up the SNT structure and interfaces with the state Medicaid agency. See How to Choose a Financial Advisor for Inheritance Planning for what to look for.

42 U.S.C. §1396p(b)(1)(B) — mandatory estate recovery for Medicaid long-term care costs, age 55+. LII — 42 U.S. Code § 1396p
Medicaid estate recovery: surviving spouse and minor/disabled child protections. Medicaid.gov — Estate Recovery
First-party Special Needs Trust under 42 U.S.C. §1396p(d)(4)(A). LII — 42 U.S. Code § 1396p(d)(4)
ABLE Age Adjustment Act — expanded ABLE eligibility from onset before age 26 to onset before age 46, effective January 2026. ABLE National Resource Center — Age Adjustment Act Fact Sheet
2026 ABLE annual contribution limit: $20,000. ABLE National Resource Center — 2026 Contribution Limits

Statutory citations verified against current federal law (42 U.S.C. §1396p). ABLE limits per ABLE National Resource Center (2026). Last reviewed May 2026.

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