How to Protect Retirement Savings From Nursing Home Costs

Protecting retirement savings from nursing home costs takes a mix of legal structures, insurance, and government programs put in place years before you need care. The core moves are an irrevocable asset protection trust funded at least five years ahead, long-term care insurance purchased while you’re still healthy (ideally a partnership policy), and, if a crisis hits before any of that is in place, Medicaid-compliant annuities combined with the spousal protections built into federal law. Medicare is not part of the answer. It does not cover long-term custodial care at all.¹

The stakes are real. A private nursing home room now runs about $355 a day, or roughly $10,800 a month, at the national median.² Medicare pays for short-term skilled nursing after a qualifying three-day hospital stay, capped at 100 days per benefit period, and that’s it.³ Most Medigap and private health insurance stop at the same point. Everything after that is on you, or on Medicaid, and Medicaid will only pay once your assets are nearly gone.

Start Five Years Before You Need Care

Every serious planning strategy runs into the same wall: the five-year look-back. When you apply for Medicaid to cover nursing home care, the state reviews the previous 60 months of financial transactions. Any transfer for less than fair market value during that window, including gifts to family and transfers into most trusts, triggers a penalty period during which Medicaid will not pay for your care.⁴

The penalty is calculated by dividing the amount transferred by the average monthly cost of nursing home care in your state. Give away $100,000 in a state where the average is $10,000 a month, and you face 10 months of ineligibility. Worse, the penalty clock doesn’t start until you’re already in a facility and would otherwise qualify, so you can end up owing a nursing home bill with no way to pay it.

This is why the ideal time to act is your early to mid-60s. Fund a trust at 63 and the assets clear the look-back by 68, around when the risk of needing care starts rising sharply. Transfers completed more than 60 months before the application fall outside the window entirely. Wait for a diagnosis and the most powerful tools are off the table.

Move Assets Into an Irrevocable Trust

The most widely used advance tool is an irrevocable Medicaid asset protection trust. You move assets (typically the home, investment accounts, and other non-retirement property) into a trust you cannot revoke, amend, or draw principal from. A separate trustee manages the assets for your named beneficiaries, usually children or grandchildren.

Federal law treats this very differently from a revocable living trust. A revocable trust’s full balance counts as an available resource because you can pull the money back. In a properly drafted irrevocable trust that bars any payment of principal to you, only the income the trust generates counts, and only if the trust actually allows income distributions to you.⁴ The principal itself is not a countable resource.

Three things make or break the strategy. First, timing: the trust must be funded at least five years before you apply for Medicaid, because funding it is treated as a gift for look-back purposes. Second, the trust document has to explicitly prohibit any distribution of principal to you or your spouse, and name a trustee who is not either of you. Third, the drafting has to account for taxes. Many elder law attorneys structure these trusts so the assets stay in the grantor’s taxable estate at death, which preserves a stepped-up cost basis for the beneficiaries. IRS Revenue Ruling 2023-2 confirmed that assets in irrevocable trusts excluded from the estate do not receive that step-up, so beneficiaries who sell an inherited home could owe capital gains on decades of appreciation. The trust can achieve both Medicaid protection and the step-up because the two bodies of law follow different rules.

At death, trust assets pass directly to the beneficiaries, bypassing probate, and they are also out of reach of Medicaid estate recovery (more on that below).

Buy Long-Term Care Insurance While You’re Still Healthy

Long-term care insurance is the primary private-market tool for avoiding the Medicaid system entirely. Policies pay a daily or monthly benefit toward nursing home, assisted living, or home care, typically triggered when you can no longer perform at least two activities of daily living or you have a cognitive impairment.⁵ Benefits from a tax-qualified policy are generally not taxable as income.

Standalone traditional policies have become expensive and harder to find. Hybrid products that pair life insurance with a long-term care rider have filled much of the gap: if you need care, the policy pays for it; if you don’t, your beneficiaries receive a death benefit. The hybrid structure removes the “use it or lose it” objection that keeps many people from buying coverage at all.

Partnership Policies Protect Assets Twice Over

Long-Term Care Partnership Programs, expanded nationally under the Deficit Reduction Act of 2005, do something traditional policies don’t: for every dollar a qualifying policy pays out in benefits, you can protect an equivalent dollar of assets if you later need Medicaid.⁶ A policy that paid $200,000 lets you keep $200,000 above the standard Medicaid asset limit, and the same disregard applies during estate recovery after death.

Partnership policies must meet specific federal requirements and are generally bought in a participating state. Price and availability both turn on age and health, so buying in your late 70s usually means prohibitive premiums or outright denial.

If You’re Already in a Crisis

If care is needed now and no advance planning is in place, two tools still do meaningful work: Medicaid-compliant annuities and legitimate spend-down.

A Medicaid-compliant annuity converts a lump sum of cash (a countable asset) into a stream of fixed monthly payments (income). To avoid being treated as a transferred asset, the annuity must be irrevocable and non-assignable, actuarially sound (payments must return the full investment within your life expectancy), structured as equal payments with no deferrals or balloon payments, and must name the state as the primary remainder beneficiary up to the total Medicaid benefits paid, or as secondary beneficiary after a spouse or minor or disabled child.⁴

The practical use is dramatic. If a couple has $300,000 in savings and the community spouse is allowed to keep $162,660, the remaining $137,340 would normally need to be spent on care first. Purchased as a compliant annuity, that same money converts into monthly income the spouse at home can live on, instead of being handed to the facility.

Legitimate spend-down works alongside this. Paying down a mortgage, making home repairs, replacing an old vehicle, and prepaying funeral costs all reduce countable resources without triggering transfer penalties, because you’re receiving fair value in return. The baseline Medicaid asset limit is $2,000 for an individual applicant and $3,000 for a married couple’s applicant portion.⁷ Your home is generally exempt as long as you intend to return or a spouse or dependent lives there, subject to a state-set equity cap that for 2026 runs between $752,000 and $1,130,000. One vehicle and ordinary personal belongings are also excluded.

Protections for a Healthy Spouse

Federal law contains spousal protections designed to keep the healthy spouse out of poverty when the other spouse enters a nursing home. They apply automatically when one spouse applies for institutional Medicaid.

Community Spouse Resource Allowance

The Community Spouse Resource Allowance lets the spouse remaining at home keep a share of the couple’s combined countable assets. For 2026, the federal maximum is $162,660 and the minimum is $32,532.⁸ Some states grant the maximum automatically; others use a formula based on half the couple’s resources at the time of application, floored and capped by those federal numbers. Anything above the allowance belonging to the applicant spouse must be spent on care before Medicaid starts paying.

The gap between a state’s minimum and maximum allowance can exceed $130,000. Whether the healthy spouse keeps that money or loses it often turns on how assets are titled and when the application is filed.

Minimum Monthly Maintenance Needs Allowance

If the community spouse’s own monthly income falls below a federal floor, part of the institutionalized spouse’s income can be diverted to them. For 2026, that allowance runs roughly $2,644 to $4,067 per month depending on state and housing costs, with an excess shelter allowance built in for high housing expenses.⁸ If the community spouse’s own Social Security, pension, and investment income already meets the maximum, no diversion is permitted.

Veterans Benefits That Help Pay the Bill

Veterans and their surviving spouses have access to a pension benefit many families miss. The Aid and Attendance pension pays wartime veterans who need help with daily activities or are housebound due to disability. For 2026, the maximum annual pension for a single veteran with no dependents who qualifies for Aid and Attendance is $29,093 (about $2,424 per month); a veteran with one dependent can receive up to $34,488.⁹

Eligibility requires at least 90 days of active duty with at least one day during a wartime period, plus a financial need test. The net worth limit for the pension period running from December 2025 through November 2026 is $163,699, which includes most assets plus annual income.⁹ That is far more generous than Medicaid’s $2,000 limit, so a wider range of veterans can qualify. The pension can be used alongside Medicaid planning, but the VA has its own look-back on asset transfers, so the two programs need to be coordinated.

Don’t Forget Estate Recovery

Planning that works during life can still be undone after death. Federal law requires every state to seek reimbursement from the estate of a deceased Medicaid recipient who was 55 or older for nursing facility services, home and community-based services, and related hospital and prescription drug costs.⁴ Some states go further and recover the cost of all Medicaid services. The home that was exempt while you were alive, because a spouse or dependent lived there, can become a target after both spouses have died.

States cannot pursue recovery while the deceased is survived by a spouse, a child under 21, or a child of any age who is blind or disabled.⁴ States must also offer hardship waivers. Federal guidance identifies three qualifying situations: when the estate is the sole income-producing asset for survivors with limited income (such as a family farm), when the home is of modest value (50 percent or less of the average home price in the county), or when other compelling circumstances exist.¹⁰

This is a major reason irrevocable trusts sit at the center of long-range planning. A home transferred into a properly drafted irrevocable trust more than five years before the Medicaid application is no longer part of the recipient’s estate and is out of reach of recovery. Partnership-policy asset disregards also apply during estate recovery. Without one of these shields in place, the family home that survived eligibility can still be lost after death.

Tax Traps in the Planning Itself

Transfers into an irrevocable trust or gifts to family members are gifts for federal tax purposes. In 2026, you can give up to $19,000 per recipient per year without filing a gift tax return. Transfers above that must be reported on IRS Form 709, though no tax is owed until cumulative lifetime gifts exceed the $15 million estate and gift tax exemption.¹¹ For most families, the reporting requirement matters more than the tax. Failing to file Form 709 creates documentation problems years later.

The stepped-up basis question matters just as much. As noted above, assets in an irrevocable trust that are excluded from the grantor’s taxable estate do not receive a step-up at death under Revenue Ruling 2023-2. A trust designed only for Medicaid protection, without attention to estate inclusion, can save the family from nursing home costs and then hand them a capital gains bill on sale. The fix is in the drafting, which is why this work generally belongs with an elder law attorney who handles both sides.

Every year of delay narrows what’s available. The irrevocable trust needs five years. Long-term care insurance needs good health. Partnership protection needs a qualifying policy bought in time. The crisis tools (annuities, spend-down, spousal protections) can still preserve meaningful amounts after a diagnosis, but they recover far less than planning done a decade earlier would have kept intact.

1
Medicare.gov. Long-term care Coverage
2
Genworth Financial. CareScout Releases 2025 Cost of Care Survey Results
3
Medicare.gov. Skilled nursing facility care
4
Office of the Law Revision Counsel. 42 USC 1396p – Liens, Adjustments and Recoveries, and Transfers of Assets
5
Administration for Community Living. Receiving Long-Term Care Insurance Benefits
6
Centers for Medicare & Medicaid Services. Long Term Care Partnerships
7
Social Security Administration. SSI Resources
8
Office of the Law Revision Counsel. 42 USC 1396r-5 – Treatment of Income and Resources for Certain Institutionalized Spouses
9
U.S. Department of Veterans Affairs. Current Pension Rates for Veterans
10
Centers for Medicare & Medicaid Services. State Medicaid Manual Part 3 – Eligibility – Medicaid Estate Recoveries
11
Internal Revenue Service. What’s New — Estate and Gift Tax