Right now this issue has been largely ignored by state laws. But unless future legislation exempts 529 plans from Medicaid rules, it would be wiser to assume that these assets could be subject to the state's grasp.
To qualify for Medicaid most states require that assets and monthly income fall below certain limits. A state may add up the assets and income that are legally used for paying bills. It is possible to make assets unavailable by giving them away or by keeping them in certain trusts. In many cases, though, such transfers may generate a period of ineligibility before it becomes possible to collect Medicaid.
The potential problem with 529 plans is that contributions are "revocable." This indicates that it is permissible to contribute money to a grandchild's 529 account and then take it back later (subject to income taxes and a penalty). The state Medicaid authorities may consider the 529 gift to be a countable asset when considering your eligibility for Medicaid.
In addition, the state has the right to "look back" at a person’s finances 60 months from the date of application for Medicaid. Contributions made to a grandchild's 529 account within this period may delay eligibility for Medicaid. It’s best to consult a Medicaid planning attorney and keep abreast of changes in local state laws with respect to Medicaid and 529 plans.
Note: Investors should consider the investment objectives, risks, charges, and expenses associated with 529 plans before investing. More information about 529 plans is available in each issuer's official statement, which must be read carefully before investing. Likewise, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits.
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