Decisions about annuities need to take into consideration the possibility that you or your spouse may need long-term care. Some annuities may be helpful, but others could make you ineligible for Medicaid. Proceed with caution.
If a financial advisor is talking to you about annuities, remember that any decision needs to be in alignment with your overall estate plan, and that includes planning for the possibility of Medicaid. Certain annuities will be considered a resource available for payment of medical costs, which could make you or your spouse ineligible for Medicaid, according to a recent article in Financial Advisor, “Annuities Can Help or Harm Medicaid Eligibility.”
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.
The rules are clearly structured to discourage the use of annuities, where Medicaid is concerned. The overriding principle is simple: the state would prefer people to use their own funds to pay for their care, before the state begins to cover the cost. Because rules are not uniform nationwide, speak with an elder care attorney in your state before making a decision about an annuity purchase.
Reference: Financial Advisor (May 11, 2018) “Annuities Can Help or Harm Medicaid Eligibility”