Medicaid planning with annuities The Courier,July 17 Posted:07/22/08
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Annuities have been part of the Medicaid planning arsenal for years. The reason elder law attorneys recommend annuities has to do with the distinction that the Medicaid law makes between resources and income.
Let’s assume that Mr. Smith, a married man, breaks his hip and ends up residing in a nursing home. He and his wife, Mrs. Smith, own their home, worth $400,000, and approximately $300,000 in cash and investments.
The Medicaid law would permit Mrs. Smith to retain the home and about $100,000 of the cash. If the Medicaid Office had its way, Mr. and Mrs. Smith would spend the excess $200,000 on Mr. Smith’s care at the nursing home.
Elder law attorneys, such as I, are in the business of attempting to preserve as much of that $200,000 as possible for the benefit of Mrs. Smith. One way that an elder law attorney might suggest to do that is through an annuity.
An annuity is a planning technique because unlike resources, such as the house and the $300,000 in cash that the Smiths own, income belongs to the spouse whose name is on the check. In other words, if Mr. Smith receives Social Security income of $1,000 a month and a pension of $500 a month, that is his income. If Mrs. Smith receives $500 a month in Social Security income, that is her income.
Resources are pooled. Stated otherwise, whatever Mr. Smith owns, Mrs. Smith owns, and whatever Mrs. Smith owns, Mr. Smith owns. It is irrelevant which spouse’s name is on the resource or which spouse brought the resource into the marriage.
Income, unlike resources, is not pooled.
A properly structured annuity can convert excess resources into income payable to one spouse. For instance, going back to the Smiths, the Smiths have $200,000 in excess resources. Barring any plan, the Smiths would need to spend $200,000 on Mr. Smith’s nursing home bill before Mr. Smith would qualify for Medicaid.
But if Mrs. Smith takes that $200,000 and purchases an immediately payable, irrevocable, non-assignable annuity in her name, she will effectively convert the $200,000 in excess resources into income. Since the income from the annuity is payable to her, and not to Mr. Smith, the income is Mrs. Smith’s. Moreover, since Mrs. Smith’s income does not count against Mr. Smith, Mrs. Smith has sheltered the $200,000 in excess resources, and Mr. Smith will qualify for Medicaid.
As you might surmise, the Medicaid Office hates annuities. Any planning technique that can qualify a married individual with hundreds of thousands of dollars in excess resources for Medicaid within a matter of days annoys the Medicaid Office.
So, the Medicaid Office has attacked the use of annuities for years. In recent years, the focus of the Medicaid Office’s argument is on the ability to sell an annuity on a secondary market.
There are companies that will purchase these annuities for a discount. For instance, there are companies that will give Mrs. Smith a portion of what she paid for her $200,000 annuity, based upon her age and other discount factors. These companies, for instance, might pay Mrs. Smith $170,000 for the $200,000 annuity that she just purchased.
According to the Medicaid Office, since these companies exist, annuities are resources, not income, so the use of annuities is an ineffective Medicaid planning technique.
I, and other elder law attorneys, would vehemently protest the Medicaid Office’s argument against annuities, but one thing I know for certain. The Medicaid Office’s position is completely unsupportable when it comes to annuities purchased inside qualified plans, such as IRAs.
I have a letter from the leading company in the secondary market that specifically says that company will not purchase an annuity owned inside a qualified plan, such as an IRA. The reason these companies will not purchase annuities owned inside IRAs has to do with the tax liability associated with withdrawals from this type of account.
I believe the Medicaid Office will relent on its position with regard to annuities owned inside IRAs. As for annuities not owned inside IRAs, the beat goes on.
