Low-Basis Stock and Florida Medicaid: Selling for Spend-Down vs. Keeping the Step-Up

Alvin's situation: a lot of gain, not a lot of basis

Alvin is 86 and lives in Boca Raton. He is a composite I am describing to illustrate a pattern I see often, not an actual client. He bought a block of stock in the 1990s for a fraction of what it is worth today, and that brokerage account now sits at roughly $400,000. His family is building a care plan that will require Medicaid to help cover the cost of a nursing facility, and they know the countable asset limit for a single applicant is very low. Their instinct is to sell the stock, generate cash, and spend it down. Their worry is the capital gains tax bill that sale would trigger, on top of everything else they are managing.

That worry is reasonable. Florida Medicaid does not care what Alvin paid for the stock in the 1990s. It only looks at what the account is worth on the first moment of the month he applies. The cost basis is invisible to the Department of Children and Families eligibility worker reviewing the case through ACCESS. But the IRS absolutely cares about that basis, and so should Alvin's family before anyone calls the brokerage to sell.

Why Medicaid and the IRS are asking two different questions

It helps to separate two things that get tangled together in family conversations. The first is Medicaid countability: is this asset counted toward the resource limit, and at what value? For a brokerage account, the answer is yes, and the value is current fair market value, full stop. The second is capital gains tax: if the asset is sold, what is the taxable gain, and who owes the tax? That is governed entirely by federal tax law, not by Florida Medicaid policy.

Because these are separate questions, the size of Alvin's unrealized gain has zero effect on whether he qualifies for Medicaid. It has a very large effect on how much of that $400,000 actually reaches his care needs versus the IRS, depending on how and when the stock is sold. That is the planning opportunity his family should not skip past.

The smarter order: cash and low-gain assets first

In my practice, I tell families there is usually a sequence that costs less in taxes than selling the biggest gain first. The general idea is to use the assets that do not carry a tax penalty before touching the ones that do.

• Cash and cash equivalents first. Checking, savings, CDs, and money market funds can be spent on legitimate care costs or converted into exempt assets without triggering any gain.
• Low-gain or no-gain lots next. If Alvin's brokerage account holds multiple tax lots purchased at different times, a good broker or CPA can identify which shares have the smallest embedded gain and sell those first, leaving the lowest-basis shares untouched as long as possible.
• Appreciated, low-basis stock last. If spend-down ultimately requires dipping into the oldest, most appreciated shares, that sale should be sized carefully and timed with the CPA's input on the year's overall tax picture.

This order does not change the Medicaid math at all, since Medicaid looks at total countable resources regardless of which account they came from. What it changes is the tax bill Alvin's family pays to get there.

Spending down into exempt assets, not just spending cash

Not all spend-down has to mean writing checks for care. Florida Medicaid planning recognizes a distinction between true spend-down, where money is exchanged for services with nothing coming back, and asset conversion, where a countable asset becomes an exempt one of similar value. Common conversions include paying down a mortgage on the homestead, making necessary home repairs or modifications, purchasing a vehicle, or prepaying funeral and burial arrangements.

When these conversions are funded with cash or low-gain shares rather than the most appreciated stock, the family accomplishes two goals at once: countable resources go down, and the biggest embedded gain stays untouched a little longer. This is where coordinating the spend-down category list (covered in our general spend-down article) with the tax-lot analysis (the focus here) really pays off.

What the step-up in basis is actually worth

Under federal tax law, an asset that is still owned at death, and that is includible in the owner's estate for tax purposes, generally receives a new cost basis equal to its value on the date of death. For Alvin, if his original basis was a small fraction of today's $400,000 value, and the stock is still in his name when he passes, his heirs could potentially receive it with a basis reset to the then-current market value. Sell it the next day, and there may be little or no capital gain to report at all.

That is the trade-off every family with low-basis stock is really weighing. Sell now to spend down, and someone pays capital gains tax on decades of appreciation. Hold it until death instead, and the gain may simply disappear for income tax purposes, though the asset still has to be accounted for in the Medicaid eligibility picture while Alvin is alive, and it may be subject to Florida's estate recovery program afterward depending on how title is held.

An annuity option when there is a healthy spouse

If Alvin had a spouse still living independently in the community, part of the appreciated stock could potentially be converted into an immediate, Medicaid-compliant annuity for the community spouse's benefit, rather than sold outright for spend-down. A properly structured annuity purchase is not a transfer for Medicaid purposes, and it converts a countable asset into an income stream for the spouse who remains at home. Because Alvin has no community spouse in this example, that particular tool is not part of his plan, but families reading this with a healthy spouse in the picture should ask their elder law attorney whether it applies to them.

Why the CPA has to be in the room before the first sale

I always tell families: call the CPA before you call the broker. Once shares are sold, the tax consequence is locked in for that year, and there is no undoing it. A CPA can run the numbers on which tax lots to sell, how a sale interacts with Alvin's other income for the year, whether a partial-year strategy makes sense, and how the sale affects any Medicare premium surcharges tied to income. The elder law attorney, meanwhile, is tracking the Medicaid asset limit, the lookback period, and whether any portion of the stock can be protected through a trust or spousal strategy. These two advisors need to talk to each other, not just to the family separately, because a move that helps on one side can create a problem on the other.

For Alvin's family, this coordination meant mapping out exactly how much stock needed to be sold to reach the asset limit, identifying the lowest-gain lots to sell first, converting part of the proceeds into exempt home repairs and a prepaid funeral, and leaving the rest of the appreciated shares untouched for the time being. The result was a smaller tax bill than an all-at-once sale would have produced, and it left open the possibility that remaining shares could still receive a step-up in basis later.

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.