Mom Inherited an IRA. How Does Florida Medicaid Treat It?

Lucille's situation: a $140,000 inherited IRA and a bill due next month

Lucille is 85 and lives in Clearwater. I'll say up front that Lucille is a composite I use to illustrate how this plays out, not an actual client, but her numbers reflect a pattern I see often. A few years ago her sister passed away and left Lucille an IRA now worth about $140,000. Lucille is not the original owner, so this is what the tax code calls an inherited IRA, and it comes with its own distribution rules separate from an IRA she might have opened herself. Now Lucille needs nursing home care starting next month, and her family is asking the obvious question: does that $140,000 keep her off Medicaid?

The honest answer is that it depends entirely on what Lucille does with the account between now and the day her Medicaid application is reviewed by the Department of Children and Families through the ACCESS system. An inherited IRA sitting as a lump sum is treated very differently from the same account converted into a stream of monthly payments.

Asset or income: the fork in the road for any IRA under Florida Medicaid

Florida's long-term care Medicaid programs, including nursing home Medicaid and the Statewide Medicaid Managed Care Long-Term Care program, generally limit an applicant to a very small amount of countable assets. I've covered that asset limit in detail elsewhere in this series, so I won't repeat the full eligibility picture here. What matters for this article is the specific rule for retirement accounts.

Florida treats a retirement account, including an IRA, as a countable asset if it is just sitting there as a balance the owner could withdraw. But if the account is in payout status, meaning the owner is taking regular, periodic distributions rather than letting it accumulate, the principal balance is generally excluded from the countable asset calculation. The tradeoff is that every distribution Lucille actually receives becomes countable income for that month, measured against Florida's monthly income cap for nursing home Medicaid.

This is the central decision point for any family holding an IRA, inherited or otherwise, on the eve of a Medicaid application: leave it as a lump sum and it counts as an asset, or annuitize it into payments and it counts as income instead.

The ten-year rule makes an inherited IRA a different animal

Here is where Lucille's case gets more complicated than a typical IRA. Because she inherited this account from her sister rather than opening it herself, federal tax law does not let her stretch distributions over her own lifetime the way an IRA owner sometimes can. Under the rule that came out of the SECURE Act, a non-spouse beneficiary like Lucille generally must empty an inherited IRA within ten years of the original owner's death.

There's an added wrinkle the IRS clarified in more recent final regulations: if Lucille's sister had already started taking her own required minimum distributions before she died, Lucille may also be required to take annual distributions in years one through nine of that ten-year window, not just a single withdrawal in year ten. That means Lucille may not have full discretion over whether distributions happen this year. Some amount may be legally required regardless of her Medicaid timeline.

Converting the balance into monthly income: what that actually does

One option Lucille's family explored was restructuring the account, where permitted, so it pays out in smaller, regular monthly installments rather than Lucille holding a $140,000 lump sum on the resource snapshot date. Done correctly, this can move the IRA out of the asset column, since it's no longer a balance she could cash out at will, and into the income column instead.

But that doesn't make the income disappear. Each monthly distribution counts against Florida's income cap for nursing home Medicaid eligibility. If Lucille's total countable income, including this IRA distribution, Social Security, and any pension, exceeds that monthly cap, her family would need to set up a Qualified Income Trust, something I've written about separately in this series, to bring her under the limit. The IRA doesn't eliminate the need for a QIT in Lucille's case; it just changes how large a QIT deposit might be required each month.

There's also a practical limit on flexibility once Medicaid approval is in place. Generally, once an applicant is receiving benefits, they cannot simply stop taking distributions or take extra ones to suit the asset picture; required distributions tend to need to continue as structured, which is one more reason this needs to be set up correctly before the application, not adjusted after the fact.

The tax conversation nobody wants to have in a crisis

Because Lucille's sister's IRA was likely a traditional, pre-tax account, every distribution Lucille takes from it is ordinary taxable income to Lucille in the year she receives it. A single large withdrawal to simplify the Medicaid asset picture could create a real tax bill, on top of whatever Medicaid income consequences follow. A smaller, spread-out distribution schedule is often gentler on the tax return, but as noted above, Lucille doesn't have unlimited discretion over the schedule because of the ten-year rule and the possible years one through nine requirement.

This is exactly the kind of decision where an elder law attorney and a CPA need to be in the same conversation. The attorney is thinking about the Medicaid asset test, the income cap, and timing relative to the nursing home admission date. The CPA is thinking about marginal tax brackets, whether a Roth conversion was ever done on the original account, and what withdrawal pattern minimizes the tax hit across the ten-year window. Neither professional should be making this call alone.

What Lucille's family chose

In this composite, Lucille's children worked with an elder law attorney and her late sister's CPA together before the application went in. Because some annual distribution was already required under the ten-year rule given her sister's RMD history, the family couldn't avoid taking money out entirely. Instead, they structured the inherited IRA to pay out in regular monthly installments sized to meet the required minimum, rather than pulling a larger discretionary amount, and the Medicaid application was timed to the month that distribution schedule was already in place.

The monthly distribution pushed Lucille's countable income above the cap, so her attorney set up a Qualified Income Trust sized to capture the overage, keeping her technically eligible on the income side. On the resource side, because the IRA was in true payout status rather than sitting as a lump sum, it was excluded from the countable asset test, and Lucille qualified without having to spend the $140,000 down to near zero first. The CPA, meanwhile, prepared the family for the tax return that would reflect this year's distributions, so there were no surprises next spring.

This article is for general informational purposes only and does not constitute legal advice, nor does reading it create an attorney-client relationship. Florida estate, elder, probate, and real estate law are fact-specific and change over time. Consult a licensed Florida attorney about your individual circumstances. Arthur Simpson, Esq. is licensed to practice law in the State of Florida. Attorney advertising.