How Annuities Can Protect Medicaid Claims
When a nursing home stay appears unavoidable, one's family may be painfully pulled in different directions to insure eligibility for Medicaid benefits. On the one hand, self-impoverishment or "asset spend-down" might be considered, yet onerous and unforgiving "lookback" rules might well sabotage the strategy. On the other hand, any draconian assault on one's lifelong effort to build wealth may be controversial and understandably resisted.
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A more appealing alternative for many married couples whose assets exceed the very modest "community spousal resource amount" involves creative reliance on an investment in an annuity. Following the rules permits the effective transformation of an "available" asset to an "exempt" asset.
Illinois law, consistent with federal standards, now sanctions the use of an annuity under which the investor's cash is irrevocably transferred to an insurance company in exchange for its promise of future periodic payments.
Payments are typically made monthly and must last for at least four years.
A fraction of each payment is treated as the tax-free return of the investor's capital; the balance is taxable as interest. In no event may such payments be guaranteed for a term longer than the life expectancy of the annuitant, who might be either the institutionalized individual or his or her spouse.
Probably the greatest planning opportunities are to be found in the careful design of a "staged," "period certain" annuity.
A "staged" annuity is back-loaded. Its payments increase at an agreed rate to reflect anticipated changes in other income and the annuitant's special needs.
A "period certain" annuity doesn't take annuitant's life expectancy into account at all. Its payments are guaranteed. If the annuitant dies during the payout period, the remaining payments are made to the contingent beneficiaries he or she identifies when the annuity is set up. So, no loss in value results from the annuitant's early death.
Combining the features of the "staged" and "period certain" annuities may offer nursing home-bound individuals the flexibility they need to preserve wealth while qualifying for Medicaid benefits. A couple of examples (under Illinois law) will prove the point.
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Suppose an unmarried woman, age 85, is expected to live no more than two years. She owns $100,000 of assets more than she is permitted to own and qualify for Medicaid. Since Illinois law assumes that her life expectancy is 6.63 years, she purchases a $100,000 annuity with a six-year period certain. The agreed monthly payments are $301.60 with a final, lump-sum payment of $99,290. The annuitant will qualify for Medicaid since her annuity is not considered an "available" asset. Yet, should she die during the annuity period, her heirs will receive any remaining monthly payments and the final payment of $99,290.
Or, consider the married couple which has $50,000 in "excess" assets. The 82-year-old husband is institutionalized and has monthly income of $800. His 78-year-old wife (whose presumed life expectancy is 10.24 years) has income of $350 per month. They buy a period-certain annuity that pays $155.83 per month for ten years and a lump sum of $48,810. The husband is assured of Medicaid eligibility and his wife gets to retain all the monthly income for her maintenance needs.
Thus, careful planning can protect one's Medicaid eligibility... while preserving one's wealth.