What Is a Medicaid Annuity and Is it Beneficial?

Medicaid Qualified Annuities can help you protect your assets in the future.

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Some long-term financial planners and tax advisors use Single Premium Immediate Annuities (SPIAs) to help people protect financial assets from depletion, yet remain qualified for Medicaid extended care or nursing home benefits while living. This is becoming an increasingly common situation with an aging population and it is important to act in advance of any need to benefit.

If structured correctly, approved, and signed off on by qualified tax advisors and elder care legal experts, SPIAs for Medicaid planning allow you to receive extended care Medicaid benefits legally and maintain your asset values for your spouse, heirs, and beneficiaries.

Countable Assets and Medicaid

When trying to qualify a spouse for Medicaid extended care assistance, the formula used includes the household or married couple’s "countable" assets. This is a very important complete asset inventory and includes assets in both joint and individual names.

The Community Spouse Resource Allowance (CSRA) permits a certain asset amount to be reserved for the healthy spouse. This amount is determined at the state level, to ensure the healthy spouse doesn't enter poverty due to caring/paying for their ailing spouse's needs. The total household assets (joint and individually held) must be spent down to that level before the spouse in need qualifies for Medicaid benefits. The remainder is protected for use by the healthy spouse.

The purchase of an SPIA can be advantageous in the countable asset calculation because it can be earmarked as a separate income stream and is not subject to liquidation of assets used to pay for costly confinement care. There are some requirements as to the timing of the annuity purchase, so seek professional guidance. You can't purchase an annuity after a spouse starts using extended care and expect that asset to be protected under CSRA rules. This is about planning ahead.

SPIA Protection As a Medicaid Annuity

With an aging population comes the need for many to have confinement care-type coverage at some point. The Medicaid annuity strategy can provide the needed stability and asset protection people desire during this difficult life stage. The IRS rules can be nearly predatory in these situations; after spending your life paying taxes, saving money, and building up your net worth. Fortunately, proper structuring and use of an SPIA under the “Medicaid Annuity” banner can provide needed guarantees while following all the rules currently in place.

Seek Guidance From an Elder Care Lawyer

Never do it yourself when it comes to Medicaid planning and implementing a Medicaid annuity strategy. A qualified CPA or elder planning lawyer should always sign off on and approve before moving forward with any product implementation. There are too many details that must be addressed correctly to not trigger potential issues with the IRS, and the rules vary by state. 

For starters, the CSRA-specific rules and asset levels must be determined and followed so the spouse that needs Medicaid coverage qualifies properly. Other specific steps must be followed, and the process can be complex, cumbersome, and even impossible to discern if you try to go it alone.

If the plan is incorrectly implemented and/or not structured properly, then tax penalties and a possible 5-year “clawback” rule could apply. This look-back period is 60 months prior to application, except in California, where it is 30 months. Any assets given away or transferred in this period can become part of countable assets and postpone Medicaid eligibility.

Origins of SPIA

Single Premium Immediate Annuities are the original annuity design that was developed in the Roman times. SPIAs have been available in the United States for more than 200 years and were the only annuity product type available until 1955. They are the most simplistic and transparent transfer-of-risk annuity types available, very pro-customer, and the best way to solve for income needs now as well as income for life.

SPIAs can truly add value if used within your Medicaid and estate planning. Done correctly, the Medicaid Annuity plan implemented for one spouse can be the conduit for possible or eventual coverage for the healthy spouse.