26 Jun Will my beneficiary’s inheritance be taken by Medicaid?

Q. I am a retired teacher in New Jersey. When I pass away, my beneficiary will get a benefit from the State. If my beneficiary is not currently on Medicaid (but was a couple of years ago), and she currently gets medical Medicaid benefits for her daughter who is disabled, will the state take the money that is left after my funeral is paid for? She has never gotten food stamps or heating assistance or anything like that. This issue came to light for me this week while planning my sister’s funeral. The funeral home informed my sister’s beneficiary that the state will take the proceeds after her funeral is paid for. I have never been on Medicaid, so I am not familiar with all of the rules. I am just trying to educate myself and may plan my funeral a little differently.
— Planning ahead

A. We’re sorry to hear about your sister.

There are a few things to unpack here.

First, Medicaid and Supplemental Security income (SSI) are two different “needs based” federal programs, said Catherine Romania, an estate planning attorney with Witman Stadtmauer in Florham Park.

Needs based means that there are both income and asset caps that you cannot exceed in order to qualify, she said.

Although the income cap is periodically increased, the asset cap has remained at $2,000 (with certain assets considered “non-countable” or excluded). Medicaid covers health insurance and SSI provides monthly payments to individuals with disabilities or who are 65 or older, Romania said.

“Absent special circumstances, benefits stop if at the end of the month an individual’s income or assets exceed the limitation,” she said. “Therefore, if money is received by gift or inheritance, it must be spent down immediately so that by the end of the month the income and asset tests are once again met.”

Medicaid has an estate recovery statute.

For example, Romania said, a recipient of Medicaid may own a home (as a home he/she or a spouse is living in can be an exempt asset) but upon death and the sale of the home, Medicaid would be repaid for funds expended. Any excess funds would pass to the decedent’s heirs or beneficiaries, she said.

She said Medicaid only requires the recovery of benefits paid to an individual after the age of 65 (or 55 in certain circumstances) and where there is no surviving spouse. There are other exceptions to the Medicaid estate recovery statute such as if there is a surviving child under a disability, she said.

“If you know an individual is receiving government assistance and you want to provide funds for his/her benefit as a gift or inheritance, it is recommended that a supplemental needs trust — also known as a third-party special needs trust — be established for the individual and the funds be placed into that trust,” she said. “Such trust funds will not count as the beneficiary’s assets and will not be subject to estate recovery.”

Romania said when an individual already receiving government assistance receives an inheritance, it may be possible to fund a first-party special needs trust.

“This will allow the beneficiary to stay on the government program but any funds remaining in the trust upon the beneficiary’s death will be subject to Medicaid estate recovery,” she said. “Attempting to disclaim (or refuse) the inheritance is not recommended as Medicaid will likely treat it as a transfer and impose a penalty period wherein benefits are discontinued.”

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This story was originally published in June 2026. 

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