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The key to qualifying for medicaid is working down your assets. Yes, they will consider both your monthly income as from pensions and your total assets in determining elegibility.

The usual way to qualify is to give away your assets (as to your children or charity) and then wait through the look back period (which varies from state to state but is typically 3 years).

So taking a lump sum and rolling it over to an IRA gives you the most flexibility. Once you are over 59-1/2, the IRA gives you much freedom--to buy an annuity later, or to take distributions and gift them on whatever schedule seems appropriate.

I can't help you on the liability question. Hopefully someone else can respond.

Taking the pension as a lump sum and then cashing it out is the worst from the point of view of taxes. You will lose large chunks to income taxes and possibly penalties. Usually IRA and then distributions that minimize the tax burden are best--if you have the time.

The right answer depends on your overall circumstances.
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