Many people use annuities in strategies to protect their assets in the event of a nursing home stay. These strategies are commonly called Medicaid annuity strategies.
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To understand Medicaid annuity strategies, you need to have a brief understanding of Medicaid. Very simply, Medicaid provides medical benefits (in this case, nursing home benefits), to those who have very few assets (e.g. $2000). For people who are not wealthy but have some savings, a nursing home stay often depletes their life savings before Medicaid will help. To protect their limited assets, many people turn to Medicaid protection strategies.
One popular strategy is to buy a what is referred to as a Medicaid Annuity. It’s important to realize that there really is no such thing as a Medicaid annuity. There are simply annuities that, in some states, may preserve some of your assets for your heirs. Even though Medicaid is primarily funded by the federal government, each state modifies the program to suit its needs. In other words, each state has different rules for receiving Medicaid benefits. Therefore, the information here is extremely general and should not be used in planning a specific strategy. If you want to pursue any kind of Medicaid strategy, I highly recommend you get a competent elder law attorney to advise you.
In the simplest terms, Medicaid provides nursing home benefits to those without available assets. To determine if you have assets available for nursing home care, Medicaid looks at your sources of income and your investments. However, Medicaid treats different types of assets in different ways. Some are includable and some are excludable in the qualifying calculation. Those who use a Medicaid annuity strategy attempt to convert includable investment assets into excludable assets. Generally, properly designed immediate annuities are excludable.
To use this exclusion to their heirs’ advantage, people often purchase a special type of immediate annuity that not only pays the annuitant lifetime payments but also has a lump sum death benefit for the heirs (of the unused principal, if any). Since the principal of the annuity is not available to the one in the nursing home, it is counted as excludable (in some states). The idea is that since the asset is excluded from Medicaid’s calculation, more Medicaid benefits will be received.
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During the annuitant’s life (the one who went to the nursing home), the annuity’s payments usually goes to the nursing home facility (or Medicaid) to pay for the nursing home care. At the annuitant’s death, the balance of the annuity is paid to the heirs as a lump sum. The hope is that none of this money will go to Medicaid. If you and your attorney decide to use a Medicaid annuity, I recommend using an annuity company who specializes in this area. If you would like to discuss specific annuities people often use, don’t hesitate to call me.