A Medicaid annuity is a way to help protect your financial assets while qualifying for Medicaid extended care or nursing home benefits.
By planning for this option before you need it, you can give you and your spouse the best chance of a healthy and financially sound long-term care plan.
What Is a Medicaid Annuity?
A Medicaid annuity comes in the form of a single premium immediate annuity (SPIA). The way it works is quite simple, and much like other common risk transfer tools. You pay a single lump sum upfront (the premium, in bulk), and in return your insurer promises to give you monthly payouts of a certain amount for a given amount of time, in this case for the rest of your life. The intent behind Medicaid's use of the SPIA is to grant people a way to preserve their financial assets for the future, while they qualify for the program.
SPIAs are in common use among experts in the field as well. Some long-term care planners and tax advisors use SPIAs to help people protect their assets while trying to secure funds for care at a nursing home or other long-term care facility.
If structured in the right way and approved by a CPA or elder care legal expert, an SPIA may allow you or your spouse to receive extended care Medicaid payouts, within the bounds of the law. It also ensures that the spouse who does not receive care still has money left to fund their own costs of living.
It's wise to plan ahead if you expect to use an SPIA to help you or your spouse qualify for Medicaid.
How a Medicaid Annuity Works
Medicaid helps to pay for nursing homes and other forms of long-term care for those in need. Your wealth and assets will be used to figure out whether you are eligible for this type of aid. The program is designed to help people who are below a certain income threshold, but there are many rules that factor in, and not all who apply are approved. Some assets are "countable" towards the threshold and others are not. Medicaid takes a complete survey of your assets, which includes those that are held jointly, as well as those only in the name of you or your spouse, so it really is a team effort.
The Community Spouse Resource Allowance (CSRA) allows you to reserve a certain amount of assets for the healthy spouse.
Each state sets its own CSRA amount. The figure takes into account the living costs in that state, with the intent to ensure the healthy spouse doesn't go broke due to caring for and paying for their ailing spouse's needs. The total household assets (both joint and held by only one spouse) must be spent down before the spouse in need can receive funds from Medicaid. The assets that remain are saved under the CSRA for use by the healthy spouse.
With an SPIA, the fund you purchase is immediately annuitized. This means it starts paying out right away, per an installment plan based on the life expectancy of the annuitant. In these cases, the healthy spouse would be the annuitant.
The purchase of an SPIA can be helpful to those who are trying to qualify for Medicaid because it may be counted as income and not as an asset.
There are some strict rules around the timing of the SPIA purchase. (In fact, they can be quite tricky, so if you're in doubt, seek expert advice.) For example, you can't purchase an SPIA 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. SPIAs that comply with Medicaid rules often need to be planned far ahead of the time they start paying out.
Medicaid mandates that you 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.
How to Buy a Medicaid Annuity
Unless you are an expert or have done this work before, jumping in to Medicaid planning cold is not advised. You should never take a DIY approach when it comes to Medicaid planning or carrying out an SPIA strategy that works with the program. A CPA or elder planning legal expert should always approve and sign off on your plan before you move forward with any product purchase. The main reason for this caution is because the system is highly complex. There are too many details to address so you don't trigger legal issues with the IRS or with Medicaid. Also, the rules vary by state, so there's no single resource with all the answers. If you need help you're best off speaking with a person you trust who knows how the program works where you live.
For starters, the CSRA-specific rules and asset levels must be followed to a T for the spouse who needs Medicaid funds to get approved without issue. Many other steps must be followed with extreme care as well, and the process can be very hard to discern if you try to go it alone.
If you fail to structure or carry out your SPIA plan the right way, you may incur extra tax penalties. The five year look-back rule may also apply, which means your actions of the past five years are also under review.
This look-back period is 60 months prior to the date you apply, except in California, where it is 30 months. Any assets you give away or transfer during this time can become part of your countable assets, and could postpone your Medicaid eligibility.
Do I Need a Medicaid Annuity?
An SPIA is a simple and lawful risk transfer tool. It can be the best way to solve for income needs now as well as in the future. SPIAs can add great value to your plan if used as part of your long-term care and estate planning. When done correctly, a Medicaid annuity plan that is put in place for one spouse can help ensure the financial well-being of the other spouse.
- A Single Premium Immediate Annuity (SPIA) is a way to protect assets when qualifying for Medicaid extended care and nursing home benefits.
- The intent of the program is to prevent the spouse who does not receive Medicaid funds from going broke while they take care of the other spouse.
- SPIAs are complex and should be guided by a CPA or an elder care legal expert.
- SPIAs are part of a long-term strategy so the sooner you can act, the better prepared you will be.