MIL gifted us 800 a month so we could pay her bills and a couple of ours because she was going to come and live with us. What to do now?

You will need proof of you paying her bills. If they question that the amounts don't add up to the $800 a month, that can qualify as your fee for providing this service to her. If you are her POA then they will not question it.

You will need to get receipts on the bills; if you paid her bills for her, there will be no problem as long as it's documented. Now about some of your bills, you paid out of the money she gave.... that's a problem because that money is her asset to be used for her living expenses. You could say that a certain percentage of the funds she gave us were for performing financial/caregiving services for her put you will need to document it. I would contact a certified eldercare attorney and discuss with him/her. Keep in mind that we all age and may need help that we did not anticipate in our younger days. That is normal. It is not normal to expect the taxpayers to fund the care of your relative if you have used her money to fund your lifestyle or pay for your bills.
We had a family whose relative will being "evicted" from a lovely AL because she had exhausted her private funds to pay them and needed to apply for NJ Medicaid. Medicaid examined the application and found that $17k of her money had gone to renovate the family's kitchen. Even though they claimed they did it for the senior citizen, the state penalized her and we did not accept her in our LTC facility. No the AL did not deposit her on the curb but they found her a Medicaid bed in a facility that was totally decrepit and barely holding on to it's state certification. Get some temporary part-time jobs and figure out how to pay the required funds back when requested. You don't want to have to become a full time caregiver if she needs to stay in your home until she qualifies for Medicaid. Good Luck

Paying her bills out of her own money is not gifting. There are also Medicaid exemptions for I believe amounts given up to $5,000. You can get the information about this exemption by contacting your state's Department of Social Services. They will send it to you for free.

If you can round up the documents to prove what you spent the $800 per month on for her needs, you could be ok. If you don't have records to show it was spent for her needs, you may have to pay it back to her account. Or, the total she gave you could/would be counted as gifts and create a penalty period for her if she needs Medicaid.

If she doesn't need Medicaid for the next 5 years, it should be ok. They 'look back' at her finances for 5 years.

You need to be honest with the Medicaid caseworker and tell her you were ignorant of any gifting rules regarding Medicaid, and tell her (if she asks) that the money was going to household bills. You're not alone, many people are not familiar with the rules and procedure of applying for LTC Medicaid, so try not to feel too bad or stressed out. You may get lucky, MIL may get approved, and no penalty period will be assessed. If MIL is denied Medicaid or a penalty period is assessed, the nursing home may start asking you to pay the balance due. That is possible, although I'm not completely sure. I've never read of any stories here or elsewhere on the web. If it gets to that point where the NH is demanding payment, try to work out a payment plan, or if that doesn't work, seek legal aid or an elder attorney's advice (you can get a free initial consultation usually). What I do know though is the NH is required to discharge mom to a safe environment, so don't ever feel you have to take her in if you are unable to take care of her. You don't. The NH cannot just throw her to the curb. (Seek an attorney, it will help ease your mind). The site below has useful information, and one thing it mentions that I forget to add is to appeal and reapply.

https://www.medicaidplanningassistance.org/denied-medicaid/

If you have proof you used her money to pay her bills, you should be fine. Just gather all the receipts. You should have a record of the money she gave you and the bills you paid. If you used any of her money on your bills, that’s going to be a problem.

This is why we warn so often on forum that you cannot co-mingle money in this way. When and if the elder needs to have medicaid help the gifting of money will not be explained adequately, and everyone is unable to prove what happened. There are others who often comment on Forum who have a good deal more knowledge than I do re Medicaid. Hope they are around and may have a clue what to tell you.