Medicaid Planning: How Income Shifting Can Help Preserve Eligibility

When it comes to Medicaid planning, income limits can be one of the biggest hurdles to overcome—especially for married couples where one spouse is entering long-term care and the other remains at home. Fortunately, income shifting strategies exist to help protect a family’s financial stability while still qualifying for Medicaid benefits.

Let’s dive into how these income-shifting strategies work, particularly in Texas, and how they might apply to your family’s situation.

What Is Income Shifting?

Income shifting is a legal Medicaid planning strategy designed to reallocate income from the spouse entering a nursing home (the “institutionalized spouse”) to the spouse who remains at home (the “community spouse”). This can help ensure the community spouse has enough income to maintain their quality of life, while also helping the institutionalized spouse meet Medicaid’s strict income limits.

Here are two of the most commonly used income shifting strategies in elder law:

1. Using a Qualified Domestic Relations Order (QDRO)

In Texas, one powerful (but lesser-known) strategy is to obtain a Qualified Domestic Relations Order, or QDRO. This is a court order that allows the transfer of certain income streams—often retirement income—from one spouse to the other.

How It Works:

• A QDRO must be issued by a judge, which typically takes about three months.

• This approach is used when, for example, Dad receives most of the household income, and Mom is the one applying for Medicaid.

• By filing for a QDRO, part or all of Dad’s income can be shifted to Mom, the community spouse, to support her while allowing Medicaid eligibility for the institutionalized spouse.

This is a legal and strategic way to navigate the "name on the check" rule, which generally says income is counted for the person whose name is on the check. The QDRO overrides that standard.

Note: This strategy must be executed carefully and typically involves a Medicaid application and sometimes a Qualified Income Trust (also known as a Miller Trust) for the institutionalized spouse.

2. Purchasing a Medicaid-Compliant Annuity

Another sophisticated income shifting tool is the use of a Medicaid-compliant annuity. This works particularly well when there are significant resources in the name of the institutionalized spouse, and the goal is to convert those resources into a protected income stream for the community spouse.

What You Need to Know:

• The institutionalized spouse purchases the annuity using countable assets.

• The annuity must meet strict Medicaid guidelines to avoid penalties.

• Once set up, the annuity pays income directly to the community spouse, shifting resources out of the Medicaid applicant’s name.

This strategy is incredibly useful, but it’s also very complex. Any misstep—such as buying the wrong type of annuity or structuring payments incorrectly—can trigger penalties or even disqualify the Medicaid application.

Defining the Community Spouse

Before we go further, it’s important to clarify what “community spouse” means in this context. It has nothing to do with community property laws (even though the terms sound alike).

• A community spouse is the spouse not living in a nursing home or other institutional care facility.

• Medicaid provides specific protections for the community spouse’s income and assets, which can be safeguarded through proper planning.

Final Thoughts: Why You Need a Medicaid Attorney

Income shifting can provide crucial support for spouses facing long-term care decisions, but it is not a DIY strategy. From navigating complex legal instruments like QDROs to structuring annuities that meet Medicaid’s strict requirements, these are strategies that require professional legal guidance.

If your family is facing the high costs of long-term care and you're unsure how to qualify for Medicaid without losing everything, working with an experienced elder law attorney is essential.

We’re here to help. Contact our office today to discuss your options for income shifting and long-term care planning.