What Is a Medicaid Annuity and Is it Beneficial?
Some long-term care financial planners and tax advisors use single premium immediate annuities (SPIAs) to help people protect their financial assets while qualifying for Medicaid extended care or nursing home benefits. It's essential to plan ahead if you're planning to use an SPIA to help you or your spouse qualify for Medicaid.
If structured correctly and approved by qualified tax advisors or elder care legal experts, an SPIA may allow you or your spouse to receive extended care Medicaid benefits legally. It also ensures the financial needs of the spouse not receiving care are met.
Countable Assets and Medicaid
Medicaid helps to pay for nursing home and community-based care for those who qualify. Medicaid looks at your assets to determine whether you are eligible. Some assets are "countable" and others are not. Medicaid takes a complete asset inventory and includes assets in both joint and individual names.
The Community Spouse Resource Allowance (CSRA) allows you to reserve a certain amount of assets for the healthy spouse. This amount is determined at the state level to ensure the healthy spouse doesn't enter poverty due to caring for and paying for their ailing spouse's needs. The total household assets (joint and individually held) must be spent down before the spouse in need qualifies for Medicaid benefits. The remaining assets are protected for use by the healthy spouse.
With an SPIA, you purchase an annuity, and it is immediately annuitized. This means that it's immediately paid out in installments based on the life expectancy of the annuitant. For Medicaid planning, the healthy spouse would be the annuitant.
The purchase of an SPIA can be helpful to those qualifying for Medicaid because it may be counted as income and not as an asset. There are some requirements as to the timing of the annuity purchase, so seek professional guidance. For example, you can't purchase an annuity after a spouse starts using extended care and expect that asset to be protected under CSRA rules. All of this needs to be done sooner rather than later. Medicaid-compliant annuities require planning ahead.
Medicaid requires you to disclose any annuities you have. You may also need to name Medicaid as a beneficiary so your state can cover the cost of caring for you or your spouse.
Seek Guidance From an Elder Care Lawyer
Never take a DIY approach 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 your strategy before you move forward with any product implementation. There are too many details that must be addressed so you don't trigger potential issues with the IRS or with Medicaid, and the rules vary by state.
For starters, the CSRA-specific rules and asset levels must be determined and followed so the spouse who 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 five-year look-back 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 during this period can become part of countable assets and postpone Medicaid eligibility.
Single premium immediate annuities are a simple and transparent transfer-of-risk vehicle. They are very pro-customer and can be the best way to solve for income needs now as well as in the future. SPIAs can add value if used as part of your Medicaid and estate planning. Done correctly, a Medicaid annuity plan implemented for one spouse can help ensure the financial well-being of the other spouse.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.
LongTermCare.gov. "Medicaid Long-Term Care Services." Accessed Feb. 18, 2020.
LongTermCare.gov. "Financial Requirements—Assets." Feb. 28, 2020.
ILAO. "Community Spouse Rules for Medicaid." Accessed Feb. 18, 2020.
III. "What Are the Different Types of Annuities?" Accessed Feb. 18, 2020.
CMS. "Important Facts for State Policymakers Deficit Reduction Act," Page 2. Accessed Feb. 18, 2020.
Department of Health Care Services. "Medi-Cal Questions and Answers," Page 3. Accessed Feb. 18, 2020.