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She currently gets a pension and social security, no longer owns a home, and has good medical insurance coverage (fortunately!). She has some savings in bank accounts and IRA's, and has a small amount of very conservative stock.

My understanding is that once you enter a nursing home, all your pension and soc sec money goes toward the nursing home fee, and the remainder is taken from your assets. Only when your assets are depleted will Medicaid kick in.

My Mom would like to leave a small inheritance to her children and grandchildren rather than spending all she has on a nursing home. What, if anything, can we do to protect her assets? Is it wise to utilize the $10K per year tax-free gift option?

I would recommend that you look for a good Elder care lawyer for some advice immediately- he should be able to draw you up a plan identifying,and scheduling when and how you should transfer funds.
He maybe be able to help you to transfer nearly 50%, possibly more, of these assets to her heirs.

When your Mom applies for Medicad, they will want her to account for the disposal of her assets during the past 3 years- so keep good records.
I think that the 10k gift is an excellent idea but should be scheduled to fit in to the plan of transfering 50% or more of your Mom's assets in spending down.

Unfortunately,I think, you are right about the pension and social security checks.

There are some other very important things for you to keep in mind if you haven't already.
1) Power of Attorney- especially if your Mom has cognative issues.
2)Health care proxy
3)A Will - resonably current
4)Your Mom can pay you a reasonable monthly fee for managing her affairs.

I hope things come together for you and your Mom !
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