Medicaid recipient (87) will be receiving $5,000 from escrow account from 7 years ago. Can she gift $1,000 to each grandchild?

No, as others have said.

But I think, there also could be other things to make this more involved...... if I had to guess that escrow account will likely be tied to the specific names the property was previously owned by. So if it was James and Susan Jones as owner of 12345 Winding Way, Whatsammattau, FL, the escrow check (with likely some interest paid) will be issued in both names as they were both owners at the time of escrow set aside. If James is now deceased, he cannot sign off on its being deposited and whether or not Susan can deposit it under her solo signature into her own personal checking account is going to depend on her bank. You cannot sign their “signatures” and deposit it into your account.

If dads Estate is in probate, mom can sign it and it goes into his probate asset account of which she can get her 50% from as a distribution from a Executor. The $2500 is still an issue for Medicaid and she’ll need to do a spend down.....

Whatever the case, that 5k will have a papertrail...
It will surface for Medicaid and IRS.

And at at some point in time, whether soon or by next January, the old holder of escrow will want a W9 from James & Susan Jones as the $5k is reportable 1099 for IRS. Just what type of 1099, I’m not sure, maybe a 1099-A and a 1099-INT. Yeah, I can totally see it not 1 but 2 types of 1099 issued for 2019 tax year for even extra fun. The escrow holder - which if I had to guess is either a real estate law firm or a specialty mortgage lender or underwriter - has to be pretty fastidious on their legal and tax paperwork. They have records with info on your folks as they knew enough about them to get in touch with them regarding the long ago escrow account. Somewhere their SS#s are in a file, but nowadays everybody wants a freshy fresh w9 every tax year. They may want a copy of dads death certificate too in order for ck just issued to your mom. You should reread the letter carefully.

So problema numero uno:
- how to legally deposit a check if written out to a couple if one is deceased. Or if with dads death certificate, it can just be in her name.
then issue numero dos:
- that $$$$ once mom’s asset MUST be disclosed to Medicaid. Probably her application has it must be done within 30 days of receipt.
then issue numero tres:
- that $$$$ will take mom over the asset limit for LTC Medicaid.
You need to find out the exact $ amount allow for nonexempt assets. Usually it’s 2k, but not for all states. $ must be only spent on items for her needs or her care but she can place some of it into her exempt asset checking bank account.
She CANNOT gift any of it to you or grandkids or her church.

In order for Medicaid to remain continuous eligibility, she must start & end her month within her states Medicaid income and asset limits. If asset limit is 2k and before all this she had zero-none-no assets set aside, personally I’d speak with her caseworker abt allowed spend downs done within a single month. Perhaps $1500-$1700 in checking account that’s POD to whomever named as Executor in her will and then spend down remaining $3,300 -3,500 in 1 big action, like a pre-need funeral or burial policy that is Medicaid compliant done like middle of the month. So all $ is moved and she ends her month ok for Medicaids strict limits for impoverishment. And her caseworker knows of the plan.

The $1500/1700 as an exempt in the bank asset gets used over time to buy things that Medicaid doesn’t pay for - like dental or extra eyeglasses - or upon death whomever it’s POD to uses it to pay for funeral related costs not included in the FH preneed policy. Like florals, which are usually never ever in a preneed contract.

$ will surface.
You don’t want Medicaid to suspended or ineligible.
If escrow wasn't disclosed in Medicaid application, could open a whole hosts of problems. It was an asset that should have been listed in her application. You want to be upfront with caseworker before doing or spending a penny.

No it may not be gifted to anyone. It maybe only be used for her care. Talk to her Medicaid representative.

No. She has to use that money for her care. She can’t gift it to anyone.

No, gifting is trouble, a real mess.  Money should go to MIL's care. However, I advise getting advice on how to handle this because that $5,000 could put her over the Medicaid eligibility.  Other posters will have some suggestions. Read Igloo 572 carefully!