Medicaid Planning: Navigating Long‑Term Care Costs and Preserving Family Wealth in 2025

Long‑term care is a major financial challenge for families across the United States. Roughly half of seniors will need nursing home or assisted‑living care at some point, and the probability rises to three‑quarters by age 85. Nursing homes are expensive—average annual costs topped $80,000 in 2016 and exceeded $120,000 in certain states. Medicare and most private health insurance policies do not cover these expenses. Consequently, many older Americans rely on Medicaid, a joint federal‑state program that pays for long‑term care for those who meet strict income and asset requirements.

The aim of Medicaid planning is to arrange finances legally so that you qualify for Medicaid benefits without impoverishing yourself or your spouse and without disinheriting your children. Effective planning can mean the difference between using all of your resources on care and preserving some assets for your family. This article explains the fundamentals of Medicaid eligibility, the look‑back rule, available planning strategies, state variations, and why early action is critical.

Medicaid Eligibility: Income, Asset Limits and Spousal Protections

Medicaid eligibility rules vary by state, but most follow federal guidelines for long‑term care coverage. Two critical thresholds are the income limit and the asset limit. For 2025, a single Medicaid applicant typically must have monthly income below $2,901 and countable assets under $2,000. Married couples applying together may keep $5,802 per month and $3,000 in combined assets. When only one spouse needs care, Medicaid allows the community spouse to retain a substantial portion of the couple’s resources—up to $157,920 in 2025 under the community spouse resource allowance.

Certain assets are non‑countable. For example, a primary residence is exempt if the applicant intends to return home or if the community spouse still lives there. Other exempt assets may include one vehicle, personal belongings, and burial plots. However, cash, savings, investments and additional real estate count toward the limit. Income is also measured broadly and includes Social Security, pensions, annuity payments and trust income.

Because the thresholds are low, many middle‑class families do not automatically qualify. Medicaid planning seeks to restructure assets or convert them into income in ways permitted by the program. The goal is to meet eligibility requirements while preserving as much wealth as possible for spouses and heirs.

The Look‑Back Period and Penalty Calculation

To prevent people from transferring assets immediately before applying for Medicaid, the program imposes a look‑back period, during which financial transactions are scrutinized. In most states, the look‑back period is 60 months (five years). When an applicant files for Medicaid, the state reviews financial records for the past five years to identify gifts or sales of property for less than fair market value. Transactions such as gifting money to children, transferring real estate to a relative or selling an asset at a steep discount can trigger a penalty period during which Medicaid will not pay for care. The penalty is calculated by dividing the total value of the transferred assets by the state‑defined monthly cost of nursing home care, known as the penalty divisor.

For example, if an applicant in a state where the penalty divisor is $8,000 gave away $80,000 during the look‑back period, Medicaid will impose a 10‑month penalty (80,000 / 8,000 = 10). During the penalty period, the applicant must pay for care out of pocket. After the penalty ends, they may qualify for Medicaid.

There are notable state variations. California eliminated its asset limit and is phasing out a 30‑month look‑back period by July 2026. New York currently has no look‑back for home‑care Medicaid but plans to implement a 30‑month look‑back for those services in 2025. Despite these differences, the five‑year rule remains the standard in most states, making early planning crucial.

Key Medicaid Planning Strategies

1. Spend‑Down Purchases and Home Improvements

One legal way to qualify for Medicaid is to spend down assets in ways that benefit the applicant. This does not mean giving money away; that would trigger a penalty. Instead, the applicant can purchase exempt items or pay existing bills. Common spend-down strategies include:

• Paying off mortgages, credit cards or other debts.

• Making necessary home improvements, such as adding a wheelchair ramp, replacing the roof or remodeling a bathroom for accessibility.

• Purchasing medical equipment or a safer vehicle.

• Prepaying funeral expenses through an irrevocable funeral trust or burial contract.

These expenditures reduce countable assets without violating Medicaid transfer rules and can improve quality of life.

2. Qualified Income Trusts (QITs)

In states with strict income caps, applicants whose income exceeds the limit can still qualify by using a Qualified Income Trust (QIT), also known as a Miller trust. The applicant deposits income over the cap into the trust, from which the trustee pays allowable medical expenses and a small personal needs allowance. Because the income is diverted into the trust, it is no longer counted for eligibility purposes. A QIT must be irrevocable, and any funds remaining at the applicant’s death generally go to the state as reimbursement. QITs are essential in states that enforce income caps and are an important tool for applicants with high monthly income.

3. Medicaid Asset Protection Trusts (MAPTs)

A Medicaid asset protection trust is an irrevocable trust that allows assets to be transferred out of the applicant’s name while still benefitting a spouse or children. Once assets have been in a MAPT for at least five years (or the applicable look‑back period), they are no longer counted for Medicaid eligibility. MAPTs are used to shelter a home, savings, or investment accounts and to avoid estate recovery after the applicant’s death. However, they are complex and must be set up well in advance to avoid penalties. For a detailed discussion of MAPTs, refer to our companion article on this topic.

4. Medicaid‑Compliant Annuities and Promissory Notes

Applicants who are over the asset limit can purchase a Medicaid-compliant annuity or structured promissory note, converting excess assets into a stream of income. The annuity must meet strict conditions: it must be irrevocable, non‑assignable, actuarially sound (the term cannot exceed the annuitant’s life expectancy), and name the state as the remainder beneficiary up to the amount of Medicaid benefits paid. Properly structured annuities can reduce countable assets while providing monthly income to the applicant or spouse during the annuitant’s lifetime. Promissory notes work similarly but function as loans repaid over time.

5. Spousal Protection Strategies

Federal Medicaid law provides significant protections for community spouses to prevent them from becoming impoverished when the other spouse requires long‑term care. The community spouse resource allowance allows them to keep up to $157,920 in 2025. In addition, the monthly maintenance needs allowance ensures the spouse receiving care can contribute a portion of their income to support the community spouse, depending on state rules. Planning strategies often involve shifting income and assets to the community spouse within permitted limits.

6. Long‑Term Care Insurance and Hybrid Policies

While not strictly a Medicaid planning strategy, purchasing long‑term care insurance can delay or reduce reliance on Medicaid. Traditional policies pay a daily or monthly benefit for nursing or in‑home care. Hybrid life-insurance policies with long‑term care riders offer another option and guarantee some payout even if care is never needed. Premiums can be high, and underwriting varies based on age and health, so purchasing coverage earlier in life is advisable.

7. Pooled Income Trusts

For individuals with disabilities or those receiving home care in certain states, pooled income trusts allow them to deposit excess income into a trust managed by a non‑profit organization. The funds are used to pay for the individual’s supplemental needs, such as rent, utilities and personal expenses, without jeopardizing Medicaid eligibility. Pooled trusts are particularly useful for people with ongoing income but limited assets.

Timing and Professional Guidance

Medicaid planning is not a last-minute exercise. Because of the look‑back rule, transferring assets must occur years before care is needed to avoid penalties. Consider proactive planning and waiting out the five‑year period to secure protection. Starting early gives families more options, including the ability to set up MAPTs, purchase annuities, or make exempt purchases gradually.

Given the complexity of Medicaid rules and state variations, professional guidance is critical. Elder law attorneys and certified Medicaid planners help navigate the maze of federal and state regulations, calculate spend-down amounts, structure trusts and annuities, and coordinate with broader estate planning objectives. They ensure compliance with laws and help avoid costly mistakes.

State Variations and 2025 Updates

While federal law sets the framework, each state administers its own Medicaid program, resulting in differences in asset limits, income allowances, look‑back periods and treatment of certain trusts. Notable trends and updates include:

• California: In 2023 the state eliminated its asset limit for Medi‑Cal (California’s Medicaid program) and is phasing out a 2.5‑year look‑back period for long‑term care. By July 2026 there will be no look‑back, making California unique among the states.

• New York: Community Medicaid (home care) currently has no look‑back, but state lawmakers plan to implement a 30‑month look‑back in 2025. Applicants should plan early to beat the deadline.

• Michigan: A home placed into an irrevocable trust may still be counted as a resource for Medicaid eligibility, so residents must explore other strategies.

• Wisconsin: Irrevocable trusts can sometimes be modified or cancelled with the consent of all beneficiaries and the grantor, offering flexibility but also requiring careful drafting.

• Florida and other states: Some states impose income caps requiring QITs, while others (known as medically needy states) allow applicants to spend down income to qualify. Understanding your state’s rules is essential.

Be aware that Medicaid programs are subject to federal and state budgetary pressures, and rules may change as lawmakers respond to demographic trends and fiscal realities. Stay informed by consulting professionals and monitoring legislative updates.

Conclusion: Planning Today Protects Tomorrow

Medicaid planning is a multifaceted endeavor that touches on estate planning, elder law and financial management. By understanding the program’s income and asset limits, the look‑back period and penalty rules, and by using strategies such as spend‑down purchases, income‑only trusts, asset protection trusts and annuities, you can qualify for needed care without surrendering everything you have worked hard to build. Spousal allowances ensure that a healthy spouse is not impoverished, while early planning and professional guidance give you time to navigate state variations and evolving laws.

The Medicaid landscape is always in flux. California is eliminating its look‑back period, New York is adding one, and the federal government continues to adjust income and asset thresholds. Whether you are years away from needing care or facing an immediate crisis, an informed, proactive approach can protect your dignity, preserve your wealth and ensure you receive quality care when you need it most.