Medicaid Spend-Down Rules for Long-Term Care: What You Need to Know

Medicaid is the largest payer of long-term care services in the United States, covering nursing home care, assisted living in some states, and home-based care for millions of Americans. However, Medicaid is a means-tested program. Unlike Medicare, which is available to nearly everyone over 65, Medicaid requires you to have very limited income and assets before it will pay for long-term care.

The process of reducing your assets to qualify for Medicaid is known as spending down. For many families, this means depleting a lifetime of savings to the point where you have roughly $2,000 in countable assets. This guide explains how Medicaid spend-down works, what assets count, how your spouse is protected, the look-back period and penalty rules, and how long-term care insurance can help you avoid this process entirely.

What Is Medicaid Spend-Down?

Medicaid spend-down refers to the process of reducing your countable assets to meet the financial eligibility requirements for Medicaid long-term care coverage. In most states, to qualify for Medicaid coverage of nursing home care, an individual must have countable assets of no more than approximately $2,000. Some states set slightly different limits, but the threshold is uniformly low.

This does not mean you must be completely broke. The rules distinguish between countable assets and exempt assets. Understanding this distinction is critical to knowing how the spend-down process works and what you can protect.

Countable vs. Exempt Assets

Medicaid divides your assets into two categories: countable (also called non-exempt) and exempt. Countable assets are those you must spend down to qualify. Exempt assets are protected and do not count toward the eligibility limit.

Countable assets typically include:

• Cash, checking accounts, and savings accounts
• Stocks, bonds, mutual funds, and other investments
• Certificates of deposit (CDs)
• Retirement accounts (IRAs, 401(k)s) in most states if you are not taking required minimum distributions
• Second homes, vacation properties, and investment real estate
• Cash value of life insurance policies above a small threshold

Exempt assets typically include:

• Your primary home (up to a state-set equity limit) if your spouse or a dependent relative lives there, or if you intend to return
• One vehicle
• Personal belongings and household furnishings
• A small amount of life insurance (typically up to $1,500 face value)
• Burial funds and prepaid funeral arrangements (up to state limits)

The specific rules vary by state, so it is important to check your state's Medicaid guidelines or consult with an elder law attorney for the rules that apply to you.

Income Limits for Medicaid Long-Term Care

In addition to asset limits, Medicaid also has income requirements. These work differently depending on whether your state uses an income cap or a medically needy pathway.

• Income cap states: In these states, your gross monthly income must be below a set threshold to qualify. If your income exceeds the cap, you may still qualify by placing excess income into a Qualified Income Trust, also called a Miller Trust.
• Medically needy states: In these states, you can spend down excess income on medical expenses to reach the eligibility threshold. If your income is too high, the excess is applied toward your care costs, and Medicaid covers the remainder.

In either case, once you qualify for Medicaid long-term care, most of your income (except for a small personal needs allowance) goes directly toward paying for your care. Medicaid covers the difference between your income contribution and the actual cost of care.

Spousal Impoverishment Protections

Federal law recognizes that requiring one spouse to become impoverished because the other needs nursing home care would be unjust. The Medicaid Catastrophic Coverage Act of 1988 established spousal impoverishment protections that allow the community spouse, the spouse who remains at home, to retain a portion of the couple's combined assets and income.

Key spousal protections include:

• Community Spouse Resource Allowance (CSRA): The community spouse can keep a portion of the couple's combined countable assets. In 2026, the maximum CSRA is approximately $154,000, though the minimum and calculation method vary by state. Some states allow the community spouse to keep half of the couple's combined countable assets up to the maximum.
• Minimum Monthly Maintenance Needs Allowance (MMMNA): The community spouse can keep a minimum monthly income amount from the institutionalized spouse's income to meet living expenses. If the community spouse's own income is below this threshold, they can receive a portion of the nursing home spouse's income to make up the difference.
• Home protection: The primary home is typically exempt as long as the community spouse or a qualifying dependent lives there. However, the home may be subject to estate recovery after both spouses pass away.

These protections are significant but still leave many families with far less than they had before one spouse entered a nursing home. A couple with $500,000 in combined assets could see their countable assets reduced to the CSRA amount of approximately $154,000, with the rest going to pay for care or being counted against Medicaid eligibility.

The Five-Year Look-Back Period and Penalty Period

One of the most important Medicaid rules to understand is the look-back period. When you apply for Medicaid long-term care benefits, the state reviews your financial transactions for the previous five years (60 months). This review looks for any transfers of assets made for less than fair market value, such as gifting money to children, transferring property, or selling assets below their true value.

If the state identifies transfers during the look-back period, it imposes a penalty period. During the penalty period, you are ineligible for Medicaid long-term care benefits even if you otherwise meet the financial requirements. The penalty period is calculated by dividing the total value of the transferred assets by the average monthly cost of nursing home care in your state.

For example, if you gifted $100,000 to your children within the look-back period and the average monthly nursing home cost in your state is $10,000, the penalty period would be 10 months. During those 10 months, you would need to pay for your own care out of pocket, which could be financially devastating if you have already spent down your assets.

Medicaid Estate Recovery

Even after you qualify for Medicaid and receive long-term care benefits, the story does not end there. Federal law requires every state to operate a Medicaid Estate Recovery Program (MERP). After a Medicaid beneficiary dies, the state will attempt to recover the costs it paid for long-term care from the beneficiary's estate.

Estate recovery most commonly targets the beneficiary's home. While the home may have been exempt during your lifetime (especially if a spouse lived there), after both spouses pass away, the state can place a lien on the property and recover funds from the sale. This can significantly reduce or eliminate the inheritance you planned to leave your children.

Estate recovery is mandatory under federal law, though some states are more aggressive than others in pursuing it. Certain hardship exemptions exist, but they are narrow and not commonly granted.

Medicaid Planning Strategies

While Medicaid's asset rules are strict, there are legal strategies that families use to protect assets and plan for potential long-term care needs. These strategies should always be implemented with the guidance of an elder law attorney, as the rules are complex and mistakes can be costly.

• Irrevocable trusts: Assets placed in an irrevocable trust more than five years before a Medicaid application are generally not counted. However, you lose control of assets in an irrevocable trust, and the five-year look-back still applies.
• Spousal transfers: Transfers between spouses are generally exempt from the look-back penalty. In some cases, transferring assets to the community spouse can help protect them.
• Converting countable assets to exempt assets: Paying down your mortgage, purchasing a prepaid funeral plan, or making home improvements can convert countable assets into exempt ones.
• Medicaid-compliant annuities: These convert a countable lump sum into an income stream for the community spouse, potentially protecting assets while still meeting Medicaid requirements.

How Long-Term Care Insurance Helps Avoid Spend-Down

Long-term care insurance is one of the most effective tools for avoiding the Medicaid spend-down process entirely. When your policy pays for your care, you do not have to deplete your own assets. This protects your savings, your home, and your ability to leave an inheritance. For a full comparison, read our guide on long-term care insurance vs. Medicaid.

Additionally, many states participate in the Long-Term Care Partnership Program. Under this program, if you buy a qualifying partnership policy, you can protect assets equal to the amount of benefits your policy pays out. For example, if your partnership policy pays $200,000 in benefits, you can keep an additional $200,000 in assets beyond the normal Medicaid limit and still qualify for Medicaid if you need additional help. Learn more about how Medicaid partnership programs work.

Here is why long-term care insurance matters for asset protection:

• Preserves your savings: Insurance pays for care so your retirement accounts, investments, and other assets remain intact.
• Protects your home: By avoiding Medicaid, you avoid the estate recovery process that could claim your home after you pass away.
• Protects your spouse: The community spouse retains access to the couple's full assets rather than being limited to the CSRA.
• Gives you more choices: Medicaid limits you to facilities that accept Medicaid patients. Long-term care insurance gives you the freedom to choose where and how you receive care.

The Bottom Line on Medicaid Spend-Down

Medicaid's spend-down rules are designed to ensure that long-term care benefits go to those who truly cannot afford to pay for their own care. But for many middle-class families, the rules can feel punishing. You may have spent a lifetime building savings, only to see them depleted in a matter of months or years to pay for nursing home care that can cost $100,000 or more per year. Understanding how much long-term care costs is the first step toward planning.

The five-year look-back period means that last-minute planning is rarely effective. If you are in your 50s or 60s and have assets you want to protect, now is the time to explore your options. Long-term care insurance, partnership programs, and proper legal planning through an elder law attorney can all play a role in protecting your family's financial future. The sooner you start planning, the more options you have available.