Annuities are regularly used in Medicaid planning, but few non-elder law practitioners understand their mechanics or their utility. Here is a simple primer to explain the Why, How, and When:
Why? Medicaid is a means-tested program which relies on the distinction between income and resources. As such, in various planning scenarios, there is an incentive to make a Medicaid applicant's resources take on the appearance of income. An annuity is a contractual promise of income: a person pays a lump sum of money to a company and the company promises to return income to that person over a period of time. Thus, annuities become very useful in Medicaid planning.
How? Prior to 2005, uncertainty surrounded the treatment of annuities, for purposes of Medicaid eligibility. The Deficit Reduction Act of 2005 created a statutory safe harbor for annuities, providing that an annuity product would definitively be treated as income so long as the annuity is (1) irrevocable and non-assignable; (2) payable in equal payments; (3) actuarially sound; and (4) names the Department of Human Services as the beneficiary to the extent of any Medicaid payments made on behalf of the Medicaid applicant. If these requirements are not met, the annuity may be treated as either a countable resource or a penalized gift.
When? Annuities are used in two (2) general situations, outlined below:
Bob and Janet are married, and Bob enters a skilled nursing home on a permanent basis. Their total countable assets are $200,000, and Janet's protected spousal share is only $100,000. Ordinarily, the other $100,000 of their assets would have to be paid toward Bob's nursing home care expenses, leaving Janet with substantially reduced assets to live on afterward. However, she consults an elder law attorney and places $100,000 into an annuity which pays her monthly income, as the annuitant, and which otherwise meets the requirements above. Now, her monthly income is increased and can accumulate in her name, while her husband immediately qualifies for Medicaid to pay for his care. (There is a great deal more complexity to this planning, but this highlights the overall process.)
Now, let's say that just Bob is alive and entering a skilled nursing home on a permanent basis. His countable assets are $200,000, his monthly income is $2,000 per month, and his monthly expenses are $8,000 per month (mostly nursing home care). Bob will not qualify for Medicaid until his assets are less than $2,400. To achieve this, he can make a gift of $120,000 to his children, which causes an ineligibility period of 13 months, during which time he will not receive Medicaid. He still needs to reduce his assets below $2,400, so Bob transfers another $78,000 into an annuity meeting the above requirements that has a payout period of 13 months. While the time frame is short, the annuity will pay out $6,000 per month during the 13 month ineligibility period. After 13 months, Medicaid begins paying for Bob's care, and he has been able to leave a significant legacy to his children. (There is even more complexity to this planning example than the one above, but again, this highlights the overall process.)
While use of annuities is routine for elder law attorneys, they should be utilized only under the advice and counsel of experienced elder law attorneys. They are a powerful tool for long-term care planning that should be approached with caution by professionals and clients alike.