I Inherited My Mom’s $180k Bank Account Outside Probate. Then Medicaid Came Asking.

When you inherit a bank account from a parent, you may think that the money is yours to keep. This might seem especially true for an account that skips probate, but the state can still seek repayment for any long-term care your parent received through Medicaid. Here’s what could happen to a $180,000 bank account and the steps to take after a Medicaid notice arrives.

Can Medicaid Take Back an Inherited Bank Account?

A bank account with a payable-on-death (POD) beneficiary usually goes directly to that person when the owner dies, rather than passing through probate. Avoiding this court process, however, does not always protect the account from Medicaid estate recovery.

States must seek recovery of certain Medicaid costs after a recipient dies. The requirement applies to many people age 55 or older who received nursing facility services, home- and community-based assistance, or related hospital and prescription drug services. ¹ If your parent had Medicaid coverage for this type of care, the state may seek recovery from assets they left behind.

Whether an inherited bank account is at risk depends on state law. Some states limit Medicaid estate recovery to assets that pass through probate, while others use a broader definition of the estate that can include certain non-probate assets. Kansas, for example, may allow recovery from certain assets that pass outside probate, including POD accounts. ² California, by comparison, limits recovery for people who died on or after Jan. 1, 2017, primarily to assets that go through probate. ³

The table below shows how different account types may be treated:

States cannot recover while the Medicaid recipient’s surviving spouse is alive, or if the recipient left a child under age 21 or a child who is blind or disabled. Federal law also requires states to provide a process for waiving recovery in cases of undue hardship.

A Medicaid estate-recovery claim is limited by the amount paid for recoverable services, so both the size of the claim and the value and ownership of the inherited account matter. A financial advisor can help you estimate how much of an inherited account may be at risk for recovery and create a plan to preserve the assets that remain.

What Medicaid Could Claim From a $180,000 Inherited Account

Suppose your parent received Medicaid-funded nursing home care after age 55 and later died with a $180,000 bank account. You were named as a POD beneficiary, so the account passes directly to you instead of going through probate.

In this example, Medicaid paid $120,000 toward your parent’s care and the account belonged entirely to them. No other assets cover the claim and no exemption or hardship waiver applies. The table shows what you could keep, depending on the state and the cost of care:

In states that only recover from probate, the POD account would generally be out of reach no matter how much Medicaid paid. Where POD accounts are eligible, higher care costs could take the entire balance, since recovery can’t exceed the value of the assets available to collect.

How You Could Protect an Inherited Bank Account

After a recovery notice arrives, you can ask the state for an itemized list of what Medicaid paid before spending or moving the inherited money. Reviewing that list can help you spot billing errors, services that aren’t subject to recovery or claims that exceed what the state can legally recover. The notice may also set a deadline to request an exemption or apply for a hardship waiver, and responding after that date could limit your options.

Planning before long-term care is needed can offer more ways to protect assets. An irrevocable Medicaid asset protection trust can move assets out of the parent’s name and, depending on the circumstances, keep them out of estate recovery. Medicaid reviews transfers made in the 60 months before someone applies, so moving assets into the trust during that period could delay eligibility for coverage.

A revocable living trust, by comparison, leaves the assets under the parent’s control, which means that states with broader recovery rules might still be able to collect from them after death. A financial advisor can help estimate how much your parent may need to pay for care during the five-year look-back period if assets are moved into an irrevocable trust.

Photo credit: ©iStock.com/Jordi Salas