Forming a Medicaid Annuity

A Medicaid annuity is a tool for converting assets into an income stream. It is perfect for qualifying someone for Medicaid when that person has a large asset but little income. It is especially useful for someone whose spouse is in a nursing home – they place a large asset into an annuity and receive a monthly income from the annuity. This helps the community spouse get their assets under the $74,820 to $109,560 resource limit. As long as the community spouse’s total income is less than $2,739, the nursing home spouse would qualify for Medicaid.

There is one major issue with annuities – according to Medicaid rules, the principal must be available for Medicaid to recover its costs after the annuity holder’s death. Therefore, the annuity is best when used for someone who has no heirs or only for a small percentage of the community spouse’s assets, just to get under the Medicaid asset limit.

As an added benefit in a few cases, savings on estate taxes as a result of the annuity can match the Medicaid claim. A Medicaid annuity is only valid if it is properly set up and the math works out, so a qualified New York Medicaid attorney and a financial planner need to be consulted.

How a Medicaid-Compliant Annuity Works

A Medicaid-compliant annuity is a single-premium immediate annuity (SPIA) issued by a licensed insurance company. The community spouse hands over a lump sum of cash, and in return the insurance company pays a fixed monthly amount for a defined period. The key feature is that once the premium is paid, the principal is no longer an asset – it has been "exchanged" for an income stream that does not count against the asset limit.

For the annuity to be Medicaid-compliant in New York, it has to meet a specific list of requirements established by the federal Deficit Reduction Act of 2005 (DRA) and the New York Medicaid rules:

• Irrevocable. The owner cannot cancel the annuity, change its terms, or pull the principal back.
• Non-assignable. The owner cannot sell or transfer the income stream to a third party.
• Actuarially sound. The payout period cannot exceed the life expectancy of the owner under the Social Security actuarial tables. An annuity that promises payments for longer than the owner is expected to live is treated as a partially uncompensated transfer for the excess.
• Equal monthly payments. The payments must be substantially equal during the term of the annuity, with no balloon, deferred, or back-loaded amounts.
• State as remainder beneficiary. The annuity must name the state Medicaid agency as the primary remainder beneficiary up to the total amount of Medicaid benefits paid on behalf of the institutionalized spouse, or as the secondary beneficiary if the community spouse is the primary remainder beneficiary in a specific spouse-only arrangement.

Annuities that miss any of these requirements are treated as countable resources or as uncompensated transfers, either of which defeats the planning purpose.

The "Just for the Spouse" Annuity

The most common Medicaid annuity in our practice is one purchased by the community spouse to bring the couple under the spousal resource allowance. Here is the typical scenario. One spouse goes into a nursing home and applies for institutional Medicaid. The couple's countable assets exceed the Community Spouse Resource Allowance (CSRA) – the amount the community spouse is allowed to keep, which is between roughly $74,820 and $154,140 depending on the year and the assets. The excess has to be spent down, transferred, or otherwise removed from the resource pool before Medicaid will pay.

Instead of spending down on private nursing home care for the institutionalized spouse, the community spouse purchases a single-premium immediate annuity with the excess assets. The annuity pays income to the community spouse over a period that does not exceed her life expectancy. The institutionalized spouse's eligibility is determined as of the date the application is processed – at that point, the couple's countable resources are within the CSRA. Medicaid begins paying for the nursing home, the community spouse keeps her monthly income from the annuity, and the family preserves significantly more wealth than they would by paying privately.

The state's right of recovery is built into the annuity – when the community spouse dies, any remaining payments under the annuity flow to the state Medicaid agency to repay benefits paid for the institutionalized spouse. But by then, much of the principal has typically been paid out as income to the community spouse, and the recovery amount is often much smaller than the total benefits the family received.

Choosing the Annuity Term

The term of the annuity is one of the most important design choices. Longer terms produce smaller monthly payments. Shorter terms produce larger monthly payments but may push the community spouse over the income allowance and create different planning issues. The term must not exceed the community spouse's life expectancy under the Social Security actuarial tables – if it does, the excess premium is treated as an uncompensated transfer with a penalty period attached.

The community spouse's age, health, and income situation all factor in. So does the cost of care for the institutionalized spouse, the size of the assets being annuitized, and the family's other financial needs. We model out different term lengths and payment amounts before settling on the right structure.

Insurance Company Selection

Not every insurance company sells Medicaid-compliant annuities. Most major life insurers offer some form of SPIA but only a smaller group will issue annuities with the specific contractual language and remainder-beneficiary structure required by the DRA and the state Medicaid rules. Working with an experienced insurance broker who handles Medicaid annuities is critical. The wrong contract may look right on its face but contain language that disqualifies it from Medicaid compliance.

Financial strength of the insurer is also a consideration. The community spouse is exchanging a lump sum of cash for a stream of payments over many years. If the insurer fails, the income stream is at risk. We recommend that clients buy only from insurers with strong ratings from A.M. Best, Standard & Poor's, and Moody's. State guaranty associations provide some backstop but with limits, so the financial strength of the issuer matters.

Income Issues for the Community Spouse

The community spouse is allowed to keep a Minimum Monthly Maintenance Needs Allowance (MMMNA) of monthly income. Where the community spouse's income falls below the MMMNA, some of the institutionalized spouse's income can be shifted to the community spouse without affecting Medicaid eligibility. Where the community spouse's income exceeds the MMMNA, the excess does not count against Medicaid. Annuity planning has to be coordinated with the income rules so that the annuity payments do not create unwanted income consequences or push the community spouse above limits that affect other programs like SCRIE or property tax exemptions.

Single-Person Annuities

Annuities are also used in single-person Medicaid planning, but the analysis is harder. Without a community spouse to receive the income, the annuity payments come back to the institutionalized recipient and are immediately required to be paid to the nursing home. The benefit is the asset conversion – the lump sum is no longer counted against the resource limit. But because of the state's remainder beneficiary requirement, much of the eventual value goes back to the state. Single-person annuities work well in limited circumstances, often as part of a larger plan involving promissory notes, gifting strategies, or trusts.

The Recent History of Medicaid Annuity Litigation

Medicaid annuities have been the subject of contested litigation in many states. The U.S. Court of Appeals for the Third Circuit (in Pennsylvania cases) and other federal courts have repeatedly upheld the use of properly-structured SPIAs as legitimate Medicaid planning tools. State Medicaid agencies sometimes try to deny coverage based on annuity arrangements, but courts generally enforce the federal statutory framework. New York agencies tend to accept well-structured annuities without litigation, but cases do come up.

Coordinating with Other Planning

An annuity is rarely the only piece of a Medicaid plan. It is usually combined with: an irrevocable Medicaid trust for assets that the family wants to protect for the next generation, a spousal refusal where the community spouse has substantial income or assets that should not be exposed to recovery, prepaid funeral expenses to remove additional countable resources, and home improvements or other exempt-asset conversions. The right combination is case-specific.

Talk to a New York Medicaid Annuity Attorney

If a spouse or family member is heading toward nursing home care and you are looking at the resource limit, an annuity may be part of the answer. The structure has to be done right – wrong contract language, wrong term, wrong remainder beneficiary, and the planning fails. Contact the Law Offices of Albert Goodwin at 212-233-1233 or by email at [email protected] to talk through whether a Medicaid annuity makes sense for your situation.