Annuities

Long term health care costs remain high and growing. Because of this retirees with significant assets should plan for their potential Medicaid eligibility. A Medicaid qualified annuity can play a part in this planning when one spouse has to enter a nursing home leaving the other one at home.

Medicaid picks up the long term care cost of elderly who are impoverished.  Long term care is very expensive and can eat up savings fast. The elder may not be able to leave a legacy to their children.

Medicaid is a federal program but handled at the local level by your State. State restrictions and regulations on Medicaid vary so you always need to be aware of your own states’ Medicaid policies.

Nevertheless, simply giving your assets away and then immediately applying for Medicaid is unacceptable under federal rules . To be safe you need to irrevocably transfer assets 60 months prior to applying. Anything shorter will prompt your state Medicaid office to attribute those assets to you and require you to pay your Medicaid monthly rate (state dependent) until all those assets have been exhausted. Only then will Medicaid foot the bill.

If you still have substantial assets, you can protect some assets for your spouse but you must strictly abide by rules for Medicaid eligibility. Here, a Medicaid annuity may be used.

A typical scenario would be if one spouse needs long term care costs to be covered by Medicaid. The couple must then divide all their assets in half and the spouse needing care must spend his or her half of the assets down to less than $2,000 in order to qualify for Medicaid benefits. But this loss of assets may reduce the standard of living for the healthy spouse at home.

So, Medicaid will allow the spouse needing care to convert his or her share of the assets into an income annuity that belongs to the healthy spouse. This legal strategy provides the healthy spouse with more income and avoids the impoverishment imposed by the Medicaid spend down requirement. These annuities must meet strict rules  imposed by Medicaid and you should seek a legal expert in this area to help you.

You can also prepare for Medicaid qualification by investing in a deferred annuity anticipating its eventual conversion into guaranteed income before applying for Medicaid. These deferred annuities should be designed so that the policy can be turned into a guaranteed income stream for either spouse of a couple. That income stream should go to the healthy spouse — the one not requiring Medicaid assistance.  In some cases, the annuity strategy can even benefit a single person.

Note that annuities once annuitized cannot be surrendered for value.  Income from deferred annuities is taxed as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty.  Income from annuitization is taxed part as ordinary income and part as return of capital. Any guarantees are based on the claims paying ability of the insurance company. Annuities should be considered long term investments.  Use of annuities as a Medicaid planning tool is regulated by each State with their own rules and a qualified advisor should be consulted. Annuities are insurance products and are subject to insurance related fees and expenses.

  http://www.medicare.org/content/view/20/67/ ‘Medicaid pays for health services for the very poor of any age. Qualifications for Medicaid vary by state, but generally the law says you must first spend down to the poverty level, using up all but about $2,000 of your assets.’
  (Section 1917(c) of the Social Security Act; U.S. Code Reference 42 U.S.C. 1396p(c)), http://www.cms.hhs.gov/MedicaidEligibility/10_TransferofAssets.asp#TopOfPage
  Medicaid guidelines for the use of annuities, which clarify OBRA ‘93, have been published by the Health Care Financing Agency. See your state rules for current restrictions.  http://www.hcfa.gov/medicare/medicare.htm

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If you are going to need long-term care at some point in the future, and have no insurance of any kind to pay for it, then you may be seriously considering spending down your assets in order to qualify for Medicaid. If this is the case, then converting some portion of your non-exempt assets into an annuity may be a viable strategy.

Of course, if this is what you intend to do, then an immediate annuity with an irrevocable payout option must be used. The payout must be irrevocable because the entire contract will be valued with the owner’s assets if the owner has the power to change the payout terms.  In order to have the annuity be exempt to quality for Medciaid, the payout must be set up a a lifetime payout based on the Medicaid life expectancy tables.

But while the transfer of assets into the contract will effectively exempt them for Medicaid purposes, care must be taken to ensure that the income stream paid out by the annuity does not exceed the amount allowed under the Medicaid spend-own rules. If this should happen, then the irreversible payment schedule would leave you with no way to reduce the income from the contract. You would thus become ineligible for Medicaid–permanently.

As an example, assume that you have chosen to enter a nursing home that costs $3,000 per month. Therefore you transfer enough assets into an immediate annuity to pay you a hypothetical income of $675 per month for the rest of your life. But you also receive Social Security income of $700 per month, which brings your total income to $1,375 per month. Unfortunately, prospective Medicaid recipients become ineligible for coverage if their monthly income is above a certain level in certain states–those states that use an income cap. For a single person living in an income cap state, the maximum amount of earned income is $1,326 . However, the specific amount of income will vary from state to state, as some states use the federal Social Security Income limits and other states impose a mandatory income cap below this amount.  But since you are over the $1,326 limit and have no power to reduce either source of your income at this point, you have effectively forfeited any chance of receiving benefits. Worst of all, your monthly income is also much too low for you to be able to pay your nursing home expenses. Therefore, if you choose to convert your assets into an immediate annuity, be absolutely certain that your income level will be acceptable once you begin receiving payments. Failure to do so could place you directly between the hammer and the anvil.   The income cap states are AL, AK, CO, DE, ID, MS, NE, NM, SC SD, and WY.

Assume however that you are not in an income cap state.  Then, assuming no other issue would preclude you from getting Medicaid benefits, the State would pay your $3,000 nursing home bill and also take your monthly income of $1375 a reimbursement.  So what good is the annuity?  If you name the beneficiary of the annuity as a family member and also select the return of premium option, your heirs will recover any of your original premium paid to the annuity company should you die before monthly payments equal your original annuity premium.

But be careful–the handling of this varies form state to state.  Some state now have a rule that the State must be named as beneficiary of the annuity or it will not be exempt.  Other state have estate recovery rules so they can place a levy against the annuity.  Check your state’s rules closely before using an immediate annuity for Medicaid planning and get advice from an elder law specialist.

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There is no such thing as a Medicaid annuity.  Annuities can however help some people shelter assets so that they can qualify for Medicaid long term care benefits.  The reader is encouraged to consult an elder care attorney to understand the laws that apply in his state.  Medicaid rules vary from state to state, so the following discussion is a general discussion of federal rules that impact the use of annuities for Medicaid planning.

Some retirees have concern about paying for ill health (long term care) in later years.  One strategy is to exhaust one’s assets and then qualify for Medicaid support.  Understandably, most people are not eager to exhaust their assets.  When it comes to counting your assets to determine Medicaid qualification for long term care benefits, properly structured annuities may be an exempt or non-countable asset and can be retained by the person who also gains Medicaid benefits. But that annuity must meet the following criteria:

1.  It must be an immediate annuity or deferred annuity that is now being annuitized

2.  The guaranteed payments must be for the life of the owner, or term certain shorter than the owner’s life expectancy

Annuity agents often refer to annuities that meet the above criteria as “Medicaid annuities.”

While the state Medicaid authority will generally not force the person opting for Medicaid to liquidate the annuity (as they would with cash or other countable assets), the annuity payments that the person receives will be taken by the Medicaid Authority to offset its outlay of supporting the ill person.  So how can you come out ahead using a Medicaid annuity?

Let’s take the hypothetical case of Mrs. Johnson, age 80, who buys an immediate annuity with a refund provision.  Her investment is $100,000 and she has no other assets.  The refund provision says that if she does not recover her $100,000 investment before she dies, payments will continue to her heirs. Thus, the annuity potentially allows Mrs. Johnson to transfer assets to her heirs that would have normally been exhausted on her long term heath care. 

But some states have moved to curtail this practice.  For example, in Pennsylvania, the purchase of an annuity that fails to name the state as remainder beneficiary “for at least the total amount of medical assistance paid on behalf of the annuitant” is treated as a transfer, and causes a period of ineligibility for Medicaid benefits.   In other words, that state basically says that if someone dies with an immediate annuity, the State will get paid back for the money it spent on the annuitant’s health care.  If the annuity owner has failed to name the State as a beneficiary, the State will treat the purchase as a transfer.  Transfers of assets within five years of applying for Medicaid benefits will cause the applicant to be ineligible for Medicaid benefits for a period of months based on the size of the transfer.

The bottom line: this method of sheltering assets using Medicaid annuities may be viable in some states and the imnplementation of Medciad eligibility rules vary from state to state.  Get proper advice from a qualified professional.

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