Medicaid planning using annuities is viable again

By Roccy Defrancesco

The Wealth Preservation Institute


Medicaid planning is typically done for clients who are about ready to enter a nursing home and need to deal with the realities of how to pay for that care, while crisis planning can also be done after someone enters a nursing home.

What's the big deal? Most clients and their advisors do not understand that in order to receive federal funds to help pay for nursing home care, there are strict limitations on how many assets can be owned and how much income can be made. If you have too many assets, you have to "spend them down" in order to receive aid. If you make too

In most states, singles can't own more than $2,000 in countable assets. There is a short list of exempted assets, and wouldn't you know it, IRAs and qualified plan money are not on the list. Married couples can't own more than $109,560 in countable assets in most states, and Medicaid Planning doesn't usually take place until after the first spouse has died.

When it comes to disqualification because of income, if you earn more than $2,022 a month in most states, you will not qualify for financial assistance.

The old days

In the old days (pre-2006), Medicaid planning with annuities was very useful. How? You would have clients reposition their assets into what are known as "Medicaid annuities." By doing so, you would turn a countable asset into a non-countable asset. Additionally, the income from the annuity could be positioned so that it would not hurt the financial aid available for the nursing home-bound spouse.

Additionally, when the client died, the value of the annuity would pass to the heirs without setoff, meaning the government didn't seize the annuity to pay itself back for the aid it gave someone while living.

The death of Medicaid planning

In 2006, the Deficit Reduction Act passed, and this was bad news for Medicaid planning. Many states interpreted the law to say that a Medicaid annuity paying to the non-nursing home-bound spouse would count against the spouse going into the nursing home who was applying for financial aid. The Act set up a situation where the non-nursing home-bound spouse also had to impoverish him/herself in order for the nursing home-bound spouse to receive federal aid. Also, the government had to be the primary beneficiary of the annuity.

This just killed the use of Medicaid annuity planning, because both spouses had to be impoverished in order for one of the spouses to receive non-countable income from a Medicaid annuity.

Because the Deficit Reduction Act was not the clearest piece of legislation, there has been some ongoing litigation to help interpret it. A few months ago, a state court of appeals (the second highest in the state) ruled and interpreted how Medicaid annuities should be treated under the Deficit Reduction Act.

The court stated that certain type of payments made to the non-nursing home-bound spouse (like those coming from a Medicaid compliant annuity) will not count against the spouse who is nursing home bound.

That's good for the society at large, because the non-nursing home-bound spouse can maintain a standard of living while he/she still lives in the marital residence. That's also good for financial planners and insurance advisors who miss the days of pouring hundreds of thousands of dollars into Medicaid compliant annuities.

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