In order to qualify for Medicaid, a single individual cannot have more than $2,000 in countable assets, and a couple cannot have more than $101,540. Any excess must be either spent down till it's gone (not generally the best alternative), gifted (which causes a costly period of Medicaid ineligibility), or converted to a non-countable asset. Such a non-countable asset is a “Medicaid annuity. " Here's how it works.
An annuity is a regular stream of payments back to you, in exchange for a lump sum of money. They can be either private (made between you and a family member) or commercial (made with an insurance company). Medicaid only allows commercial annuities.
For example, if you are a male, age 70, you could transfer $50,000 to an insurance company in exchange for a monthly annuity payment of $400, guaranteed for your life, no matter how long you lived. But what if you died unexpectedly after two years? The annuity payments would stop. Most people do not like that, and therefore will typically purchase the annuity with a “guarantee period" of at least a certain number of years.
According to the Medicaid rules, a male age 70 has a life expectancy of 12.8 years. So you cannot purchase an annuity with a guarantee period that exceeds 12.8 years without causing a period of disqualification from Medicaid. So let's stick with 12.8 years to be safe. Because you are guaranteed payments for the longer of your life expectancy or 12.8 years, the monthly payments will be lower. In this example, they drop from $400 to $354 per month.
So why would anyone do this? What if you are in a nursing home and have $50,000 too much in the bank. You could purchase one of these annuities and immediately qualify for Medicaid without having to spend down the $50,000. The $354 will have to be paid to the nursing home each month, and Medicaid will pick up the difference. Under new laws that became effective Feb. 8, 2006, the state will have to be named as the beneficiary of the annuity up to the amount of Medicaid benefits it paid on your behalf, during your lifetime.
If you live to your full life expectancy and then die, the annuity payments will stop, and the state will be unable to receive any reimbursement. But what if you happen to die after 2 years? In that case, the annuity payments will continue for the balance of the guarantee period, but must first go to the state until your Medicaid “bill" is fully paid. After that, if any payments are still to be made, they can pass to your family members.
So if the Medicaid “bill" is for two years’ of Medicaid coverage, it could easily be in the amount of $96,000 (assumes $4,000/month). Since that exceeds the value of the annuity, the state will receive all of the remaining payments and your family will get nothing.
As you can see, using the entire amount of excess funds to purchase a Medicaid annuity for a single individual rarely makes sense. However, in order to be sure, you simply must “run the numbers": how much money is there to invest in the annuity? What is the age of the nursing home resident? What is the expected life expectancy of the resident? Once you know those factors, you can try different scenarios and see whether or not it makes sense to purchase the annuity. If not, then other Medicaid planning techniques should instead be considered.
© 2007 by K. Gabriel Heiser
Attorney K. Gabriel Heiser has devoted his legal practice to Medicaid planning, elder law, and estate planning for the last 23 years.
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