Using Annuities in Medicaid Long-Term Care Planning
When one spouse has to go into a nursing home, couples can save assets from Medicaid by purchasing an immediate annuity.
Medicaid applicants with too much money or assets are denied coverage for long-term care and have to pay their own nursing home bills. For many, their savings would be depleted within months, leaving the Medicaid applicant's spouse destitute. Annuities can magically wipe away these excess resources that are preventing Medicaid eligibility and replace them with a monthly check, payable to the applicant's spouse (referred to as the “community spouse”).
Sound too good to be true? It's not, and when done properly, this technique can preserve a large portion of a couple's resources to provide for the community spouse, who may live for many years, and possibly, the couple's heirs.
First, let's provide some background that's important in understanding how an annuity can be so valuable in Medicaid planning.
In Nolo's article on when Medicaid pays for nursing homes, we discussed how income and resources are treated differently for purposes of Medicaid eligibility.
In most states, the maximum amount of resources that can be owned by the Medicaid applicant is $2,000. Resources owned by either spouse are combined when making the eligibility determination, but the community spouse is allowed to keep a specific amount of resources. This amount, called the community spouse resource allowance (CSRA), is half of all of the couple's countable resources, but not to exceed a certain limit. For 2016, the maximum amount of countable resources the community spouse can keep, according to federal law, is $119,220, but each state may set a lower limit.
When a couple is "over-resource" -- they have too many assets to qualify for Medicaid -- Medicaid requires that the money be depleted before the applicant will qualify for Medicaid. This process is called “spending down.” Medicaid doesn't really care what that money is spent on, so long as nothing is given away for less than it is worth. The couple can pay any legitimate expense, such as medical bills, taxes, credit cards, housing expenses, and so on.
Income is counted only if it is payable to the Medicaid applicant. This treatment of income follows what is referred to as the “name on the check” rule. The income of the community spouse is specifically excluded; the community spouse is allowed to keep all income payable to the community spouse.
Using Annuities to Deplete Assets
Purchasing an annuity converts an asset into a stream of monthly income for the community spouse, and the community spouse's income is not counted toward Medicaid eligibility. When an asset is turned into community spouse income, the asset “disappears” and no longer interferes with Medicaid eligibility. Purchasing an annuity means the assets don't have to be "spent down" on other things.
To be acceptable to Medicaid, the annuity payments must be completed before the end of the community spouse's life expectancy. This rule prevents the annuity purchase from becoming a gift to heirs (since no money would be left for heirs at the anticipated end of the community spouse's life). If the money is all returned to the community spouse during her lifetime, she was not able to give the money away for less than what she invested.
The type of annuity used for Medicaid transfers is known as a single-premium immediate annuity (SPIA), because it is paid for in a lump-sum premium payment and immediately begins paying back the premium to the owner (called the "annuitant"). (This is different from an annuity that is used for investment purposes that accumulates over a period of time before it is paid back to the owner, similar to an IRA).
How Purchasing Annuities Works
Suppose a couple is $100,000 over resource and desires to keep this $100,000 to benefit the community spouse rather than spending it down. Here's how an annuity can help. The $100,000 is moved to the name of the community spouse. No problem so far, because the assets are still countable regardless of which spouse owns the assets. The spouse applying for Medicaid is allowed to transfer unlimited assets to the community spouse.
Next, the community spouse purchases a single-premium immediate annuity,referred to as a “SPIA,” from a commercial insurance company. This annuity is owned by the community spouse. Since it is an immediate annuity, the insurance company is contractually obligated to begin making a series of substantially equal monthly payments to the community spouse.
Why Annuities Don't Violate Medicaid Rules
After an asset (money) is turned into an income stream payable to the community spouse, the applicant qualifies financially for Medicaid. And since the money (in the above example, $100,000,) is spent on something of equal value, it's not a gift that affects the Medicaid applicant’s eligibility (as the annuity pays back the purchase price over a period less than the life expectancy of the community spouse, eventually paying back the entire $100,000).
Even though the community spouse receives a monthly check that could accumulate into an asset if saved, this never jeopardizes the applicant's future eligibility, because 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.
Annuity Requirements to Avoid Medicaid Penalties
These requirements must be met to make a community spouse annuity work for a Medicaid applicant.
- The annuity must be purchased from a commercial insurance company.
- The annuity must be immediate.
- The annuity must be irrevocable (you can't cancel it).
- The annuity must be nonassignable and nontransferable (it can't be given to someone else).
- The annuity must pay out in a series of substantially equal monthly payments.
- The term of monthly payments must be less than the life expectancy of the community spouse, according to Social Security life expectancy tables.
- The Medicaid agency for the state that the Medicaid applicant lives in must be designated as the primary beneficiary of the annuity after the death of the community spouse. This allows the Medicaid agency to collect any unpaid funds should the community spouse die before his or her life expectancy.