Using Annuities to Avoid Medicaid Claims

The use of the annuity to protect assets has become very popular. Two recent books on the subject, The Medicaid Planning Handbook by Alexander A. Bove, Jr. and Avoiding the Medicaid Trap by Armond Buddish, are targeted toward the use of annuities to avoid Medicaid seizure.

Generally, if your assets exceed the Medicaid test limits, you may still be eligible for Medicaid by converting the assets to an immediate annuity income stream. Using an income annuity in this manner may be beneficial in the right situation if structured properly. Keep in mind that states' rules for Medicaid differ greatly and it is important to learn as much as possible about your own state's requirements. Consider Combined Monthly Income

You must be careful that the combined monthly income from the annuity together with your other social security and pension payments stays under the allowable federal limits. Otherwise, the purchase of too large an annuity income stream could inadvertently take you even slightly over the limit and completely disqualify you from Medicaid. For example: Say you want to reside in a nursing home that costs $4,500 per month. In order to pass Medicaid qualification tests, you use a significant portion of your assets to purchase an immediate fixed annuity that pays $800 per month for life. Your only other income, from Social Security and pension plans, is $525, making your combined monthly income total $1,325. Be careful that this total remains below the federal guidelines. If the federal limit were $1,315, then you would be $10 over the limit and be ineligible for Medicaid coverage. Better to purchase LESS annuity income to stay well below the threshold than more income.

The annuity income stream must begin prior to applying for Medicaid. Under the Kennedy Kassebaum and OBRA '93 Acts, an annuity must have life expectancy payout rates that are in accord with the latest social security mortality tables (HCFA Tables). Many insurance companies' payout rates are not in compliance. You should contact an agent with experience in this field. (We recommend you call ImmediateAnnuities.com at 800-872-6684, the hosts of this web site.) Immediate annuities are usually irrevocable contracts. Once the annuity has been purchased, the owner does not have the right to revoke the contract and obtain a refund (except for a "free-look" period of usually the first 10 days after purchase). Irrevocable annuities are necessary for the Medicaid planning approaches discussed below. Many states also require the annuity to be non-assignable and non-transferable. Few insurance companies offer policies which meet these last two conditions. Call ImmediateAnnuities.com at 800-872-6684 and we will suggest companies that do provide the necessary contract language.

Immediate annuities are afforded tax advantages in that a large portion of each payment is treated as a return of capital (and not taxable) while the smaller portion is considered a payment of interest.

Types of annuities

There are several kinds of immediate annuities, not all of which make payments for life. But all immediate annuities provide for periodic payments that are predetermined and specified when the contract is negotiated. Payments are made at various set intervals at least once each year, and any one contract must last for a period greater than one year.1. Life only immediate annuities. This kind of annuity produces the largest periodic payment among annuities which cover the lifetime of the annuitant. No provision is made for heirs because the contract terminates on the death of the annuitant, and all remaining principal is retained by the insurance company. Accordingly, a substantial loss is incurred if the annuitant dies early. As a result, this type of annuity is used most often when you require higher, guaranteed payments for the rest of their lives and are comfortable invading principal while they are alive. For Medicaid planning purposes, "life only" annuities are generally advisable only in the case of a married couple who have no heirs or whose heirs have been given other assets. 

2. Life annuities with refund provisions. Providing for heirs becomes possible if the annuity contract is for a period certain (continuing for the greater of the life of the annuitant or a stipulated time period), or if it provides for a refund (guaranteeing total annuity payments at least equal to the premium received by the company). To qualify under the Medicaid guidelines, the period of the guarantee cannot be longer than the actuarial life expectancy of the annuitant. Additionally, under the Estate Recovery rules passed by OBRA 93, any income that continues to heirs after the Medicaid recipient's death may be subject to recovery by the state.3. Period certain annuities. These annuities have no life component. The period of the annuity payments is predetermined and does not depend on the survival of the annuitant. The payment is guaranteed and will be made either to the original beneficiary or, in the event of the original beneficiary's death, to contingent beneficiaries named in the policy. Therefore, the owner is assured of no loss in the value of his estate due solely to an early death. Under OBRA '93, the guarantee period must be no greater than the stated actuarial life expectancy.4. Staged or "Balloon" annuities. Payments under this kind of annuity–instead of being level – are structured to increase at some agreed upon rate, resulting in lower payments in the earlier years and higher payments later. The structure is determined after taking into consideration share of cost aspects, anticipated changes in other income, special needs, and life expectancy.

Examples of the effectiveness of a staged, period certain annuity demonstrate the creative Medicaid planning techniques available:

Example: A single individual (female, age 85) has a realistic life expectancy of less than five years although her actuarial expectancy is more than six years. She owns $100,000 of excess assets (i.e., in excess of the limits permissible to qualify for Medicaid). The annuitant purchases a $100,000 annuity for five years certain, with monthly payments of $490 and a final lump-sum balloon payment of $95,000. The client qualifies for Medicaid because the annuity is an unavailable asset, but in case of death during the annuity period, her heirs will receive the remaining payments as well as the final payment of $95,000.

Example: A married couple own $20,000 in excess assets. The institutionalized spouse (male, age 82) has income of $1,300 per month, and the community spouse (female, age 78) has a monthly income of $400. The couple purchase a period certain annuity that pays $150 per month for a five-year period certain plus a final balloon payment of $15,000. This arrangement allows Medicaid eligibility for the institutionalized spouse while permitting allocation of the institutionalized spouse's excess income to the community spouse in order to keep within the monthly minimum maintenance needs allowance. Again, under OBRA '93 guidelines, the guarantee period of the annuity must be no greater than the stated actuarial life of the annuitant.

Insurance Agents & Brokers ONLY!
(not intended for the General Public)