What Is a Medicaid Annuity and Is it Beneficial?

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

By Andrew Rich/E+ / Getty Images

When planning and organizing assets in preparation for the day that Medicaid might be necessary, some CPAs and tax advisors use Single Premium Immediate Annuities (SPIAs) to help people protect assets for legacy, while remaining qualified for Medicaid benefits. 

When trying to qualify for Medicaid extended care, or nursing home, benefits, the formula used includes what is referred to as the household or married couple’s countable assets. This is a very important complete asset inventory referenced when trying to qualify a spouse for Medicaid. It includes assets in both joint and individual names. 

Community Spouse Resource Allowance

The Community Spouse Resource Allowance rules allow 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) have to be spent down to a state determined level. That level remains protected for the use of the spouse that is healthy. Once the assets are spent down to that level, then the spouse that needs care qualifies for Medicaid benefits.

This is becoming an increasingly common situation with an aging population, and a properly designed SPIA strategy can help protect your assets from being depleted.

The purchase of a Single Premium Immediate Annuity 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 confinement care type costs. There are some guidelines as to the timing of the annuity purchase, so it is necessary to seek guidance. You can't purchase an annuity after a spouse is using extended care, and expect that asset to be protected under CSRA rules. This is about planning ahead.

SPIA Purchases That Can Act As a Medicaid Annuity?

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

With an aging population comes the need for many to have confinement care type coverage. The Medicaid annuity strategy can provide the needed stability and asset protection that 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 a Single Premium Immediate Annuity (SPIA) under the “Medicaid Annuity” banner can provide needed guarantees while following all of the rules currently in place.

Seek Guidance From an Elder Care Lawyer

You should 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 need to be addressed correctly in order to not trigger potential issues with the IRS, and the rules vary by state. 

For example, the Community Spouse Resource Allowance (often referred to as the CSRA ) specific rules and asset levels have to be determined and followed so that the spouse that needs Medicaid coverage properly qualifies. There are other specific steps that need to 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.

The truth is that an SPIA can be a great protected asset if implemented properly in your portfolio. 

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 over 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, the most pro customer in my opinion, and the best way to solve for income now needs as well as income for life.

SPIAs can truly add value if used within your Medicaid and estate planning. Working with a qualified elder care lawyer can help assure that the strategy is on sound legal ground and the proper steps are followed. Done correctly, the Medicaid Annuity plan implemented for one spouse can be the conduit for possible or eventual coverage for the healthy spouse. Find a good elder care lawyer if you want to explore this strategy. It’s worth every penny.