Medicaid Planning and Beneficiary Designations: A Costly Misconception

Medicaid planning and beneficiary designations have become a growing concern as Americans live longer and long-term care costs continue to rise. Many retirees assume that naming beneficiaries on investment accounts eliminates the need for more complex planning, such as trusts, because Medicaid cannot pursue estate recovery.

That assumption, elder law attorney Harry Margolis says, is wrong.

The misunderstanding reflects confusion about how Medicaid eligibility works and what assets states can recover after a recipient’s death. In practice, naming beneficiaries on investment accounts rarely addresses the real Medicaid planning problem.

Why Beneficiary Designations Don’t Avoid Medicaid Spend-Down

To qualify for Medicaid, an individual generally must spend down countable assets to about $2,000. Investment accounts—regardless of beneficiary designations—are typically included in that spend-down requirement.

By the time Medicaid coverage begins, those assets are usually gone. As a result, Medicaid planning and beneficiary designations do not prevent the depletion of investment accounts before eligibility is reached.

For married couples, the rules differ but remain limited. The spouse of a nursing home resident may retain roughly $160,000, an amount adjusted annually for inflation. In some states, certain retirement accounts may also be protected for the community spouse.

Even then, beneficiary designations do not eliminate the spend-down required to qualify for Medicaid in the first place.

Where Medicaid Estate Recovery Actually Applies

Estate recovery comes into play only after a Medicaid recipient dies. Federal law requires states to seek repayment for long-term care costs from the recipient’s estate.

In practice, estate recovery usually focuses on the home. Because the home is often the only substantial asset Medicaid recipients are allowed to keep during life, Medicaid planning and beneficiary designations tend to be far less relevant than real estate planning.

Whether a home is subject to estate recovery depends heavily on state law. Some states limit recovery to probate assets. Others extend recovery to non-probate assets, including property transferred through life estates, beneficiary deeds, or trusts.

That distinction is critical.

Probate vs. Non-Probate Property in Medicaid Planning

Probate property is held solely in an individual’s name at death. Non-probate property passes automatically through legal mechanisms such as trusts, life estates, or beneficiary deeds.

Tools commonly used in Medicaid planning—including trusts, life estates, and in some states transfer-on-death or Lady Bird deeds—can move a home out of probate. However, their effectiveness varies significantly by state.

This is another reason why Medicaid planning and beneficiary designations cannot be evaluated in isolation.

Trusts, the Five-Year Look-Back Rule, and Timing Risks

Trusts add another layer of complexity because of Medicaid’s five-year look-back rule. Transfers made within five years of applying for Medicaid can trigger a period of ineligibility.

While the length of the penalty period depends on the value of the transfer, the takeaway is straightforward: late Medicaid planning can be costly.

For that reason, many families strike a balance. They focus on protecting the home—which often carries both financial and emotional significance—while keeping liquid assets available to pay for care and maintain flexibility.

Tying up all assets in a trust can backfire, leaving families without accessible cash when they need it most.

Why Medicaid Planning Is Not a DIY Strategy

The broader lesson is that Medicaid planning and beneficiary designations are not do-it-yourself solutions. State rules vary widely, and mistakes can have serious financial consequences.

As Margolis emphasizes, Medicaid should not be the only option considered. Maintaining flexibility, access to cash, and realistic expectations is just as important as asset protection.

Key Takeaways

• Naming beneficiaries on investment accounts does not eliminate Medicaid spend-down requirements

• Medicaid estate recovery typically targets the home, not investment assets

• State law determines whether probate or non-probate property is subject to recovery

• Trusts and life estates may protect a home but can trigger the five-year look-back rule

• Professional guidance is critical to avoid costly Medicaid planning mistakes