Medicaid planning issues, Pt. 1: Repositioning IRA assets so clients can qualify for Medicaid

By Roccy Defrancesco

The Wealth Preservation Institute

This is the first of a series of articles on difficult to deal with Medicaid planning issues.

One of the most difficult assets to deal with is an IRA. Most advisors are unaware that under the 2005 Deficit Reduction Act (DRA), IRA assets are countable assets that can really hinder a client's ability to qualify for Medicaid assistance for nursing home care.

What is Medicaid planning? Let me back up a step and remind you what I mean when I say Medicaid planning (MP). My definition of MP is fairly simple: planning done to reposition and/or convert assets as needed to allow a client to financially qualify for Medicaid.

The ethics of Medicaid planning. Usually, I receive several pieces of hate mail after discussing proper Medicaid planning. I am called nasty names and asked how I can sleep at night while helping people shield their wealth from Medicaid spend-down rules so they can obtain financial assistance from the government. I sleep very well, thank you.

Qualifying for aid. In order to qualify for Medicaid, you are only allowed to have X amount of "countable" assets in your own name. If you are single, the amount of countable assets is typically $2,000. For married couples, it depends on the state; but typically a couple can collectively have up to $109,560 of countable assets in their own name. If clients are over these amounts, they will not qualify for financial assistance through Medicaid (they have to spend down their assets in order to qualify for aid or reposition them to non-qualified assets).

IRAs. Many senior clients who are candidates to reposition assets and qualify for Medicaid do not have millions of dollars, but they may have tens or even hundreds of thousands of dollars in an IRA. Without proper planning, these clients will not be able to qualify for Medicaid and will end up spending tens of thousands of dollars of their money (including IRA money) for their care.

How do you reposition assets in an IRA to help a client qualify for aid? Many advisors will tell clients that they have to liquidate the IRA (and pay income taxes on the entire balance) and then gift the money to a loved one or trust for the benefit of a loved one. That can work; however, it's very painful to pay taxes on the IRA balance all at once and then in states governed by the DRA (which is most), the client may have to wait up to five years before being eligible for financial aid from Medicaid.

When helping clients with Medicaid planning, chances are significant that they would like to qualify for Medicaid now, so you need to give them a strategy with their IRA money that will help now.

Buying a Medicaid compliant annuity inside the IRA. As you may have read in this article from last year, one "exempt" tool you can use to transition a client's money into is a Medicaid compliant annuity.

While most planners are not aware of this, you can buy a Medicaid compliant annuity in an IRA and it will turn the IRA account balance into a non-countable resource for Medicaid eligibility rules.

Let's look at an example of how this may be used to help your clients:

Assume you have a 70-year-old client who is married and has $200,000 in her IRA. Non-exempt assets in her name equal $50,000, and the husband has $50,000 in his name (total is under the $109,560 limit to qualify for aid). She is in marginal health and really should be in a nursing home to receive proper care.

Because the IRA is a countable asset, the client will not qualify for aid, because it will shove her over the $109,560 total. Without converting the IRA asset into a non-countable asset for Medicaid eligibility purposes, the client will have to spend all of the money in her IRA to qualify for aid (expensive and not friendly planning to her heirs).

Solution: Buy a Medicaid compliant annuity in the IRA. This will then put her and her husband under the $109,560 total, and she will immediately qualify for Medicaid assistance (assuming she is under the income limits).


This article is a very cursory look at how a Medicaid compliant annuity may be used in an IRA setting to help a client "qualify" for Medicaid. There are many other issues/rules that need to be dealt with and considered when using a Medicaid compliant annuity in an IRA, including what happens to the annuity income while living, and IRA account balance upon death.

Buying a Medicaid compliant annuity is not a cure all, but it is one viable option that can be used to help certain clients "qualify" for aid.

I am writing this series of articles on Medicaid planning because I believe that in order to give complete estate/financial planning to senior clients, all advisors must know the basics about this subject matter. Hopefully you found this article interesting and helpful.

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