Using Annuities in Medicaid Long-Term Care Planning

The average cost of nursing home care just topped $100,000 a year, a cost few can afford. But Medicaid applicants with too much money or assets are denied coverage for long-term care, and they have to pay their own nursing home bills. For many people, paying for a nursing home for several months depletes their savings. While they can then qualify for Medicaid at that point, their spouses are often left penniless.

Immediate annuities can wipe away these excess resources (assets) that are preventing Medicaid eligibility and replace them with a monthly check, payable to the Medicaid 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 as well.

First, let's provide some background that's important in understanding how an annuity can be so valuable in Medicaid planning.

Medicaid Eligibility

We thoroughly discuss how income and resources are treated differently for purposes of Medicaid eligibility in Nolo's article on when Medicaid pays for nursing homes. Here's a quick summary.

Resources

In most states, the maximum amount of resources that can be owned by the Medicaid applicant is $2,000. But not all assets count toward this amount, including a car and a house (with equity up to $688,000, or more in some states). Resources owned by both spouses are combined when making the eligibility determination, but the community spouse is allowed to keep a specific amount of resources.

The amount the spouse is allowed to keep is called the "community spouse resource allowance" (CSRA) and it's different in every state.

Community spouse resource allowance. In some states, the community spouse can keep half of all of the couple's countable resources, up to a certain amount. For 2023, the maximum amount of countable resources the community spouse can keep, according to federal law, is $148,620. But if half of the couple's assets doesn't reach a certain minimum—usually $29,724 (for 2023)—the community spouse can keep all of the couple's assets when deciding if the other spouse qualifies for Medicaid.

In other states, the spouse is allowed to keep all of the couple's countable resources up to the limit, which is usually $148,620 (in 2023) In other words, the couple's assets aren't split in half when deciding Medicaid eligibility.

Spending down assets. When a couple is "over-resource"—which means they have too many assets to qualify for Medicaid—Medicaid requires that the money be spent before the applicant will qualify for Medicaid. This process is called "spending down." Medicaid doesn't really care what that money is spent on, as 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

Income is counted for eligibility purposes 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 from the determination; the community spouse is allowed to keep all income payable to the community spouse.

In addition, if the community spouse has little income of their own, federal law allows that spouse to keep some income belonging to the spouse going into a nursing home. Generally, the community spouse can keep up to $2,300 to $3,700 per month, depending on the state (that amount is called the "minimum monthly needs allowance").

Using Annuities to Deplete Assets

Purchasing an annuity converts an asset into a stream of monthly income for the community spouse, and as we just discussed, 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 (using the community spouse's life expectancy makes it unlikely that money would be left for heirs at the end of the community spouse's life).

Types of Annuities Used for Long-Term Care

The type of annuity used for Medicaid long-term care is known as a single-premium immediate annuity (SPIA), because it's paid for in a lump-sum premium payment and immediately begins paying back the premium in monthly payments to the owner (called the "annuitant").

A SPIA is a fixed annuity, meaning that the monthly payments to the community spouse are guaranteed to be the same each month (in what the IRS calls "substantially equal monthly payments").

The following types of annuities are not Medicaid-compliant:

• deferred annuities (where the investment accumulates over a period of time before it's paid back to the owner, similar to an IRA), and
• variable annuities (where the payment is different every month).

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 an "SPIA," from a commercial insurance company. This annuity is owned by the community spouse. Since it's 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. (The annuity pays back the purchase price over a period over 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.

Medicaid Claims Against a Long-Term Care Annuity

Medicaid has the right to try to get paid back for the amount it has spent on the long-term care of anyone age 55 or over. Medicaid usually waits until a nursing home resident dies and then makes a claim against the state. An annuity wouldn't be part of the estate of the nursing home resident, so Medicaid requires the annuity to be signed over ahead of time, even though it belongs to the community spouse.

If the community spouse buys a Medicaid annuity, they must name your state Medicaid agency as the beneficiary of the annuity so that any money left in the annuity will go to the agency after the community spouse dies (up to the amount Medicaid spent on the long-term care). This allows the Medicaid agency to collect any unpaid funds, should the community spouse die before their life expectancy.

Requirements for Long-Term Care Annuities 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 (payouts must begin immediately).
• 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 Medicaid annuity after the death of the community spouse.

_{Updated February 13, 2023}