How to Cash an Inheritance Check without Triggering IRS or Medicaid Alerts

The arrival of an inheritance check can be both exciting and stressful, especially if you have a financial dependency on government benefits like Medicare and Medicaid. Fortunately, there are legitimate ways to handle your inheritance without raising red flags with the IRS or Medicaid.

Understanding the Taxation of Inheritance

A common misconception is that inheritances are taxable. According to the IRS, ‘Cash received as an inheritance is not taxable income.’ This means that if you receive an inheritance, such as a $45,000 check, you do not need to declare it to the IRS.

Medicare and Medicaid Considerations

However, it's important to consider the impact of inheritances on government assistance programs. Medicare, the federal health insurance program, is not affected by inheritances. SSDI (Social Security Disability Insurance) also remains unaffected as it is designed for long-term support and not tied to financial means. On the other hand, Medicaid, a means-tested program, is more sensitive to changes in your financial status.

Evidence of Financial Status and Medicaid

Medicaid eligibility is based on financial need. If your inheritance leads to a financial surplus, you may no longer meet the eligibility criteria. Medicaid may require you to pay back the benefits they provided, especially if the inheritance exceeds certain asset limits. Therefore, it's crucial to manage your inheritance carefully and in a way that does not jeopardize your continued eligibility for Medicaid.

Legal Options for Safely Using Inheritance

One effective way to manage your inheritance while preserving your government benefits is by establishing a special needs trust (also known as an ABLE account). These accounts allow you to save and invest money without losing your Medicaid eligibility. Here are some steps to consider:

Enrolling in an ABLE Account

An ABLE (Achieving a Better Life Experience) account is designed specifically for individuals with disabilities. It offers several benefits, including:

Enabled for the individual to save and invest without impacting Medicaid eligibility Offers tax-free growth and withdrawals for qualified expenses related to the disability Encourages financial independence and self-determination

To enroll in an ABLE account, check with your state’s Department of Health and Human Services or financial advisor. Each state has its own ABLE account program, and enrollment processes can vary.

Consulting with an IRS Expert

If you have concerns about how your inheritance might impact your government benefits, it's wise to consult with a tax advisor or someone familiar with IRS regulations. For example, if you are on disability and receive an inheritance, your SSDI benefits may not be affected. However, if you are receiving SSI (Supplemental Security Income), you must report changes in income within 10 days.

Key Points to Remember

Medicare and SSDI are not affected by inheritances. SSI eligibility can be affected by inheritances over a certain threshold. Special needs trusts (ABLE accounts) allow you to save without losing Medicaid eligibility. Notify Medicaid of any changes in income within 10 days to avoid potential recoupment.

By following these guidelines, you can safely manage your inheritance without compromising your eligibility for government benefits.