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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