Purchasing an Immediate Annuity to Qualify For Medicaid

19 Sep

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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