July 31, 2026
1:44 pm

Medicaid Spend-Down Rules for Austin Families (2026)

Medicaid spend-down means legally reducing a parent’s countable assets to Texas’s $2,000 limit so long-term care coverage can begin, and in a surprising number of Austin households the last asset standing in the way is a life insurance policy nobody had thought about in years. Long-term care Medicaid in Texas is delivered through STAR+PLUS managed long-term services and supports.

This page is written for families across Travis, Williamson and Hays counties. Applications in this area are handled through the state and regional offices serving those counties, and the documentation burden is heavy enough that incomplete files are the leading cause of delay.

Nothing here is legal advice. Spend-down is a field where a good Texas elder law attorney typically saves far more than the fee, particularly given how Texas handles estate recovery.

In This Article

Countable Versus Exempt: The Basic Sort
The $1,500 Life Insurance Threshold
The 60-Month Look-Back
Legitimate Ways to Spend Down
MERP: The Texas Wrinkle Nobody Mentions Early Enough
Where a Life Settlement Fits Into the Plan
A Practical Order of Operations
Request a Free Policy Review
Frequently Asked Questions

Medicaid Spend-Down Rules for Austin Families (2026)

Countable Versus Exempt: The Basic Sort

Countable resources are what Texas totals against the $2,000 limit for a single applicant: bank accounts, non-retirement investments, a second vehicle, additional real property, and the cash surrender value of most life insurance. Exempt resources typically include the homestead within equity limits while the applicant or spouse lives there or intends to return, one vehicle, household goods and personal effects, and certain irrevocable burial arrangements.

Income is tested separately and determines the applied income, meaning the resident’s monthly share of the facility bill after eligibility. Families frequently assume clearing the asset test finishes the job. It does not.

The $1,500 Life Insurance Threshold

This is the rule that catches people. In most states, life insurance is disregarded only when the combined face value across all policies is $1,500 or less. Past that threshold, the cash surrender value becomes a countable resource because the owner can convert it to cash at will.

Practically, that means a modest whole life policy purchased in 1988 with $22,000 of accumulated cash value is not a keepsake. It is $22,000 counted against a $2,000 limit, and the eligibility worker will treat it exactly that way. Pull a current statement from the carrier showing face amount, cash surrender value and any outstanding loans before you do anything else.

The 60-Month Look-Back

The federal look-back is 60 months for transfers made for less than fair market value. California is the exception; verify current 2026 rules. Any gift inside that window can generate a transfer penalty, a period of ineligibility calculated from the value given away.

Which is why the natural instinct, signing the policy over to a child so it stops counting, is among the most expensive moves a family can make. A gift of a policy with cash value is a transfer for less than fair market value. A sale of the same policy at fair market value in an arm’s-length transaction is not a gift, and generally should not create a transfer penalty, because the estate received full value in exchange.

Legitimate Ways to Spend Down

Spend-down is conversion, not destruction. Common approaches include an irrevocable funeral trust or a prepaid burial contract, paying off outstanding debt, home repairs and accessibility modifications such as ramps, grab bars or a walk-in shower, replacing an unreliable vehicle, and a properly drafted caregiver agreement paying a family member for documented care under written terms.

Where a spouse remains at home, resources can generally be allocated to that spouse up to the Community Spouse Resource Allowance. The CSRA amount is adjusted annually, so confirm the 2026 figure before building a plan around it. Every one of these steps should be documented as it happens, not reconstructed later.

Move	Treated as	Look-back exposure	Typical outcome
Gifting a policy to an adult child	Transfer for less than fair market value	Yes, inside 60 months	Possible penalty period of ineligibility
Surrendering a policy to the carrier	Conversion to cash	No	Cash surrender value becomes countable cash
Selling a policy at fair market value	Arm’s-length sale	Generally no	Proceeds are countable cash, generally no transfer penalty
Buying an irrevocable funeral trust	Exempt conversion within limits	No	Reduces countable resources legitimately
Home accessibility modifications	Spending on an exempt asset	No	Reduces countable cash, improves the home
Informal payments to a family caregiver	Often treated as gifts without a written agreement	Yes	Use a properly drafted caregiver agreement instead

MERP: The Texas Wrinkle Nobody Mentions Early Enough

Texas runs an aggressive Medicaid Estate Recovery Program. After a Medicaid recipient’s death, MERP may file a claim against the probate estate to recover what the state spent on long-term care. Families in Travis, Williamson and Hays counties who assumed the homestead would simply pass to the children are sometimes blindsided.

Exceptions and hardship waivers exist, and Texas probate and homestead law interacts with recovery in ways that genuinely require a professional. The planning point is straightforward though: assets converted to cash and legitimately spent on the parent’s care during life are money used for its purpose. Assets sitting in a probate estate are what recovery reaches.

Where a Life Settlement Fits Into the Plan

If the policy has to go, there are three exits. Let it lapse and get nothing. Surrender it and receive the carrier’s cash surrender value. Or, for a qualifying policy, sell it on the secondary market, which typically produces more than surrender.

Settlements commonly land between 10% and 35% of the death benefit, and GAO-10-775 found sellers received roughly four to eight times what surrendering would have paid. The proceeds are countable cash either way and still have to be spent down under the same rules. What changes is how many months of care the family can fund and how much control they keep over the sequence.

A Practical Order of Operations

Build a complete inventory first: every account, property, vehicle and insurance policy, with a current statement for each. Then engage a licensed Texas elder law attorney and bring the inventory to the first meeting instead of assembling it afterward.

Ask the attorney to sequence the plan explicitly. What gets converted, what gets sold, in what order, what the projected eligibility date is, and how MERP exposure is being addressed. Then file through the offices serving Travis, Williamson and Hays counties with a complete file. A clean application beats a fast one every time.

Request a Free Policy Review

If an old policy is part of the picture, a free review will tell you whether it has secondary-market value before anyone surrenders it to the carrier. Send the policy cover page. No cost, no obligation.

Pine Lake Life Solutions reviews policies with $100,000 or more in death benefit. Call (305) 209-7183.

This page is educational only and is not legal, tax or investment advice. Medicaid limits and rules change; verify every figure with Texas Health and Human Services and work with a licensed Texas elder law attorney before acting.

Frequently Asked Questions

What is the Texas Medicaid asset limit in 2026?

The countable-asset limit for a single long-term care applicant is $2,000 under STAR+PLUS managed long-term services and supports. Married couples are handled differently through spousal impoverishment rules. Confirm the current figures with Texas Health and Human Services before planning around them.

Why does my father’s old policy count against him?

In most states, life insurance is disregarded only when total face value across all policies is $1,500 or less. Above that, the cash surrender value is an available resource because it can be converted to cash on demand. A policy from the 1980s can easily hold enough cash value to block eligibility on its own.

Can I just put the policy in my name?

That is a transfer for less than fair market value and sits squarely inside the 60-month look-back, which can create a penalty period. It is one of the most common and most damaging mistakes families make. Speak with an elder law attorney before moving any asset out of a parent’s name.

Does selling the policy trigger a transfer penalty?

A sale at fair market value is generally not a gift, so it typically should not create a transfer penalty. The proceeds become countable cash and still must be spent down under the same rules. Have your attorney confirm the treatment in your specific circumstances before closing.

What is MERP and should we worry about it?

The Medicaid Estate Recovery Program allows Texas to file a claim against a deceased recipient’s probate estate to recover long-term care costs the state paid. Texas pursues recovery actively, though exceptions and hardship waivers exist. It is a central planning question for a Texas elder law attorney, ideally addressed before an application rather than after a death.

Where do Austin families file?

Applications for this area are processed through the state and regional offices serving Travis, Williamson and Hays counties. Requirements are documentation-heavy, and missing statements are the most common cause of delay. Gather everything before you file.

How long does spend-down take?

It depends entirely on the size and shape of the estate. A simple household may reach eligibility in a couple of months; a family with property, multiple accounts and an old insurance policy may take considerably longer. Note that a life settlement itself runs roughly 60 to 120 days, so it needs to start early in the sequence.

Should we sell the policy before or after applying?

Timing depends on the household’s full asset picture, income and marital status, and getting it wrong can delay eligibility by months. Bring this exact question to a Texas elder law attorney. Meanwhile, a free policy review can tell you what the policy is actually worth so the decision is made with real numbers.

Find out what your policy is worth — free, confidential, no obligation.

A 15-minute educational review covers your eligibility, every alternative, and a realistic view of what each path would net you.

Call (305) 209-7183 · Request a review online →

Table of Contents