Medicaid planning issues, Pt. 2: Critical need Medicaid planning using annuitiesArticle added by Roccy DeFrancesco on May 25, 2010
Roccy Defrancesco

Roccy DeFrancesco


Joined: May 24, 2006

I recently stated that I was going to put forth a series of educational articles on Medicaid planning as a lead up to the Medicaid Planning Educational/Marketing seminar in Las Vegas on June 22-23, 2010. The first in my series of Medicaid articles was titled: Medicaid planning issues, Pt. 1: Repositioning IRA assets so clients can qualify for Medicaid.

This week I'm back discussing Medicaid planning, and am going to use a Medicaid compliant annuity in a critical need situation.

What is critical need planning? It's planning for clients who did not have the foresight to put together a Medicaid plan in a timely manner. In other words, they screwed up by not planning, they are on their way to the nursing home, and are calling for your help. Typically, the client is single which makes planning even more difficult.

Why does this happen? It's simple; 99.9 percent of our clients know nothing about Medicaid planning; and what's really unfortunate is that 95 percent (or more) of the financial planners, insurance agents, CPAs, and even attorneys know very little, if anything, about proper Medicaid planning.

What do you do when you get the call from your client on the way to the nursing home? You can:

A) Throw your hands up and plead ignorance (Medicaid planning? What's that?)

B) You can tell the client that Medicaid planning is bad for society, and they need to do their civic duty and give all of their money to the government.

C) You could call me, and I could refer you to an advisor who actually knows what he/she is doing, and who could help you and your client.

D) You could come out to my Vegas educational/marketing seminar so you can learn subject matter that will then enable you to really discuss the client's viable options (one of which is the subject matter of this article).

Critical need planning with a Medicaid compliant annuity

The following strategy is not a cure-all, but it's one viable way you can help certain clients in a critical-need situation.

The following explains one way to use a Medicaid compliant annuity in a critical need situation. Because the annuity is not a countable asset, a client under the right circumstances can immediately apply for Medicaid.

Example: Mr. Smith (a single person), age 65, has $75,000 in cash and a home. (The home will be subject to repayment to the state for aid provided once Mr. Smith dies). Prior to applying for aid, he funds $75,000 into a Medicaid compliant annuity so he can qualify for aid (he will be under the $2,000 allowance). Medicaid will pay for his care at the discounted Medicaid rate of, let's say, $3,000 a month. Assume Mr. Smith receives $500 a month from Social Security (SS).

Without the annuity, Mr. Smith would not have qualified for Medicaid aid. Therefore, the private-pay cost for nursing home care would have had to be paid out of his $75,000 in cash and SS income. If we assume the cost of care is $5,000 a month, it would take 16.5 months for Mr. Smith to qualify for aid ($500 a month from SS and $4,500 a month from cash would deplete the $75,000 in 16.5 months).

After the $75,000 has been depleted, Mr. Smith would then qualify for Medicaid, which would pay $2,500 month on his behalf for care ($3,000 minus the $500 in SS income).

By purchasing the annuity, he would have immediately qualified for aid. If we assume the annuity income stream is $500 a month, the state aid would equal $2,000 a month ($3,000 a month cost minus $500 from the annuity and $500 from SS equals a $2,000 a month shortfall).

If he died in five years, look at the difference when the state looks for recovery.

After five years with no annuity (remember it took him 16.5 months to qualify for aid so he received aid for approximately 43.5 months before death at a cost to the state of $2,500 a month), the recovery on behalf of the state would be $108,750 ($2,500 x 43.5 months).

Five years after purchasing the annuity, he would have immediately qualified for aid and the state would have paid $2,000 a month for 60 months (remember the $500 SS income and $500 from the annuity goes to the state to pay for expenses which is why the amount the state pays is $2,000 a month instead of $3,000 a month).

The total recovery amount by the state is $120,000 ($2,000 x 60). However, the state must first look to the annuity payments to be made whole before looking to other assets, such as a home. When using the life expectancy tables, the client is supposed to live until age 81.5. That means there are 11.5 years worth of annuity payments left that will be used for recovery before looking to other assets.

11.5 years x 12 months = 138 months. 138 months x $500 (the annuity payment) = $69,000 paid to the state from the annuity for recovery.

Therefore, from the state's recovery amount of $120,000, subtract $69,000; and that amount ($51,000) is the amount of recovery the state will look to from the estate.


Even though in both cases Mr. Smith had to spend his $75,000 because he bought the Medicaid annuity, the amount recovered from his estate was $39,750 less ($108,750-$69,000). This is very important for him and any other clients using this strategy, because it protects the value of other assets that are used for recovery after death.


I am just scratching the surface in some of my Medicaid planning articles. My hope is that those advisors who have seniors as clients will see that there is useful planning that can be done for clients who want to plan for the nursing home expenses that await them. Even when someone is in a critical-need situation, many times, the client can be helped.

Having a client do nothing to prepare for the inevitable nursing home expenses that awaits him/her is not an option in my mind; and in order to help senior clients, you must know this subject matter. Medicaid planning is not for everyone; but for those who need it, once you know how to help them, you will be a hero and help them transfer tens if not hundreds of thousands of dollars to their heirs that would otherwise go to the government.

*For further information, or to contact this author about the 1.5 Day Medicaid Planning Educational/Marketing Seminar in Las Vegas on June 22-23, 2010, please leave a comment and your e-mail address in the forum below.
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