Annuities and Medicaid planning
Did you know buying an annuity could help you receive Medicaid funding for nursing home care?
To qualify for Medicaid assistance, a person about to enter a nursing home or institution can not own more than $2,000 in assets. Without Medicaid, many couples will have their assets depleted by the high cost of long-term care. This could leave the spouse not receiving long-term care with little to no financial support.
In 1988, Medicaid law was changed to prevent this situation. Now, if the Medicaid applicant is married, a certain amount of the couple’s combined assets can be set aside for the spouse to live on without affecting the applicant’s Medicaid eligibility for nursing home assistance. The amount the spouse can keep, called the community spouse resource allowance (CSRA), depends on the state, but the federal minimum in 2015 is $23,844 and the maximum is $119,220.
Buying an annuity to qualify for Medicaid
Say you live in a state that only allows the “community spouse” to keep $50,000 in assets for Medicaid eligibility, but you own $100,000 in assets. The spouse who needs care will not receive Medicaid until you spend down the extra $50,000 in assets.
In addition, when a person applies for Medicaid, any gifts or transfers made in the five years prior to application will be counted as the applicant’s assets. This prevents a person from giving a huge chunk of his or her estate to children or charities just to qualify for Medicaid.
But instead of spending that $50,000 in nursing home care, you could use it to buy a single premium immediate annuity (SPIA) and still maintain your spouse’s Medicaid eligibility.
This is a legal, legitimate practice to preserve your retirement assets while still qualifying for Medicaid. The reason it’s accepted is that Medicaid law does not recognize an annuity as an asset, but as a source of income.
So imagine a retired couple has $100,000 in assets and the husband needs nursing home care. But they live in a state that only allows the wife to own $50,000 in assets for her husband to qualify for Medicaid to help pay for the long-term care. The wife could allocate $50,000 to a SPIA, which will pay her a set amount of monthly income for her lifetime or for a set period.
Why this works under Medicaid law
The annuity has to be owned by and the income paid to the wife — the “community spouse” in this scenario. That’s because under Medicaid law, income is only counted for eligibility purposes if it’s payable to the Medicaid applicant. The income of the community spouse is specifically excluded and he or she is allowed to keep it all. The “community spouse” can earn as much as he or she wants from a job or other source.
What’s more, even though the community spouse receives a monthly check that could accumulate into an asset if saved, Medicaid eligibility of the institutionalized spouse is never jeopardized. Once qualified, the Medicaid beneficiary must only show that he or she doesn’t have over $2,000 in assets. The value of the assets in the name of the community spouse is no longer a concern of Medicaid once he or she has qualified.
Restrictions on this practice
Medicaid-compliant annuities must be purchased by a commercial insurance company. Unfortunately, few companies offer this type of product, and there are several limitations. To qualify, the annuity must meet the following requirements:
- It must be irrevocable, meaning you don’t have the right to remove the funds. This makes deferred annuities ineligible since you can cancel the contract by paying the surrender charge. Only immediate annuities can be used.
- The annuity’s payments must be the same each month.
- The annuity income must equal an amount so that it pays as much over your life expectancy as what you paid into the contract. For example, if you have a life expectancy of another 10 years and you pay $60,000 for an annuity, it must generate annual income of at least $6,000 ($6,000 x 10 years = $60,000). This prevents the annuity purchase from becoming a gift to heirs.
- If you purchase an annuity with a set term, the term must be shorter than your life expectancy. So if your life expectancy is 10 years, the term of your annuity must be nine years or less.
- Unlike a regular annuity, you cannot assign the contract to another person. The state Medicaid agency must be designated the remainder beneficiary.
This strategy does not work for a single individual going into a nursing home because the monthly income would have to go toward paying the nursing home.
In addition to working with a licensed insurance professional with experience in these situations, you should also work with an elder law attorney.