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Careful with answer#2...your state could disqualify you for refusing to make use of income/assets available to the Medicaid recipient. And why not expect the person to do that rather than rely on public funding of their needs? I work on the other side of this issue, determining eligibility for the state.
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I assume she inherited the annuity in her own name? Not a trust established for her benefit?

If it's in her own name, Medicaid will be interested in it.

I work in the legal department of a major insurance/annuity insurance company. The situation I often see is a POA calling us saying that their loved one will come off Medicaid and cause them to start over if the they accept the benefit. The three resolutions we end up seeing on our end is (and I'm not pushing or legally recommending anything - just relaying what often happens in these situations!) :

1. Accept the proceeds and deal with the potential Medicaid issues (and yes, talk to your state Medicaid agency as to exactly what would happen if you accept it.)

2. Disclaim the proceeds, which would then be paid to the remaining primary (if any) or the contingent beneficiary or the Estate of the owner/insured. I tend to see this more often when the POA may be the next beneficiary, or another close family member of the primary beneficiary. Or the family simply does not wish to deal with the Medicaid issue. You are not required to accept the proceeds. Medicaid will not force you to accept the proceeds.

3. The one I see the least, especially on a small benefit like this (it's not small to me, but compared to what I see at the office...) is to roll the proceeds over into a Medicaid compliant annuity, and name Medicaid as a beneficiary. I definitely see this often when there is a "community spouse". You will still need to work with Medicaid should this be a possible alternative.

Check with your local Medicaid office first - your decision will follow from your knowledge of the impact on her benefits.

Best wishes.
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You would need to check with your own State Medicaid office, as each State has their own rules and regulations.
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