Private Annuities Can Aid Medicaid Eligibility: Planning Today for Later Years
Clients sometimes ask CPAs how they can qualify for Medicaid. With monthly nursing home costs between $5,000 and $7,500, for many older adults Medicaid is the only way to pay for long-term care.
Each state sets income and asset limits to qualify for Medicaid; such limits may require many people to "self-impoverish," that is, to reduce their asset and income levels in order to qualify. Often, this entails giving property away to children, grandchildren or others. However, because Medicaid requires full disclosure of certain recent gifts, and because other problems can occur (for example, gift tax), many clients may be better off creating a private annuity to shed excess wealth.
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What is an annuity?
An annuity is a contractual arrangement under which a taxpayer gives money to a third party, who agrees to a schedule to pay the money back. Annuities can be fixed or variable in return, and immediate or deferred in payment.
Private annuities are a powerful tool in Medicaid planning. A parent can purchase an annuity contract from his or her child. The child receives the parent's money in exchange for a written, contractual promise to pay a stated monthly benefit. When the owner/annuitant dies, the remaining money rests with the contract issuer (usually, the child)--which is exactly what the taxpayer wanted.
CPAs need to exercise care when structuring private annuities to make clients Medicaid-eligible; to avoid having the annuity balance count as an available asset for Medicaid purposes, they may have to meet state law requirements, such as the following:
- The annuity must he actuarially sound. It cannot guarantee payments for more than the annuitant's expected life.
- The annuity must be in force before a Medicaid application is made.
- The annuity must be irrevocable; once the contract is purchased, the owner cannot get his or her money back.
- The annuity must state that it cannot be transferred ("assigned") to another party.
We had heard about annuities and were investigating them for our IRAs. We also heard bad things about pushy brokers over the years. So when we went to the ImmediateAnnuities.com site we were skeptical about calling them. But whenever we called their staff was really friendly. They answered all our questions and one of their reps even told us that at our ages there was no advantage to buying the annuity with our IRAs. These guys are really honest!
CPAs should carefully discuss with clients the ramifications of becoming a Medicaid recipient. Medicaid was designed as a safety net for people with limited income and assets who are unable to pay for medical care, including long-term care. Further, although federal regulations require that private-pay and Medicaid residents in nursing homes receive the same level of care, differences exist--for example, a private room vs. a semiprivate room for Medicaid recipients. In addition, any income the Medicaid recipient might receive from Social Security and pensions will be applied to the costs of care.
Medicaid is a complex government program; what works for one family will not necessarily work for others. In many cases private annuities are an excellent vehicle to transfer assets to a related party and not run afoul of the Medicaid eligibility rules. But CPAs must be familiar with the laws of the specific states in which clients reside.