Financial Advisor’s recent article, “Annuities Can Help or Harm Medicaid Eligibility,” explains that Medicaid rules include both asset limitations and income limitations. Annuities can be exceptionally beneficial for a retirement income plan, such as for an older individual facing long-term care costs. However, the annuity will be viewed as a resource available for payment, which will make the applicant ineligible for Medicaid.
An annuity can help with Medicaid eligibility by transforming otherwise countable assets, like savings accounts, into a non-countable income stream, which will shield the assets for heirs, while spending down what counts against you in Medicaid eligibility. A good type of annuity for this is the Single Premium Immediate Annuity (SPIA). It’s the simplest, most transparent type of fixed annuity. It has a lump-sum premium payment at the start and a predetermined contracted payback schedule. In contrast, variable annuities invest in a range of securities that don’t have guaranteed returns.
However, the use of annuities in Medicaid planning is complex. Years ago, these annuities were treated more favorably. In 2006, federal law was amended to limit the ability to benefit from these annuities. The Deficit Reduction Act (DRA) of 2005 introduced new rules to limit the transfer of assets for purposes of gaining Medicaid eligibility. Nevertheless, there are still some uses for SPIAs in Medicaid planning.
Generally, to assist with Medicaid eligibility, a SPIA must be non-cancelable, non-assignable and actuarially sound. Therefore, it must be irrevocable, and the funds stay in the annuity, except for contracted monthly payments. Second, the annuitant must receive back at least as much as was paid into the annuity during his or her actuarial life expectancy. If there’s a guaranteed minimum number of payments, it can’t exceed that actuarial life expectancy. Finally, the DRA says that annuities must name the state as beneficiary for at least the value of the Medicaid assistance received (there may be an exception for a disabled child).
Therefore, you can convert an asset into an income stream, but you can’t change it back. The income rules must also be analyzed, to see if the additional income will be a problem. If the annuity can be converted to a lump sum or sold for a lump sum, Medicaid still treats it as an asset. This is the reason why most annuities don’t work for Medicaid purposes.
It is important to note that because of income limits for some programs and income contribution rules for other programs, conversion of an asset to a stream of income isn’t always in the best interests of a person seeking Medicaid long-term-care benefits. Talk to an elder law attorney first.
Reference: Financial Advisor (May 11, 2018) “Annuities Can Help or Harm Medicaid Eligibility”