Using an Annuity to Help the Spouse of a Medicaid Applicant

Be cautious whenever an annuity is described as helping a person to qualify for Medicaid. Any deferred annuity purchased as a planning measure – that is, an annuity that will build in value and is purchased before a person goes into a nursing home – will be considered a countable asset.

However there on particular North Carolina Medicaid eligibility strategy that does work using an annuity, but only in a crisis situation where one spouse is actually now in the nursing home. Here is how this works.

When one spouse goes into the nursing home, the at-home spouse risks spending half or more of the couple’s combined assets under the Medicaid rules. That’s because in order to qualify for Medicaid coverage in a nursing home, the applicant spous can have no more than $2,000 of countable assets. The at-home spouse (called the “community spouse”) can have one-half of the couple’s combined “countable” assets up to a maximum of $119,229 (in 2015). This protected amount is called the “Community Spouse Resource Allowance” or “CSRA.”

This is bittersweet news for the community spouse, who is glad to know that not all of the assets need to be spent down. But only keeping half of the couple’s assets still means the at-home spouse will have greatly reduced finances for the rest of his or her life. There is a better way, and it involves the use of a Medicaid qualifying annuity. Here is how it works.

Assume that John and Sharon have countable assets (bank accounts and investments but excluding their house and care) of $200,000. John goes into the nursing home. Sharon can keep $100,000 as her CSRA (1/2 of the couple’s $200,000) and John can only have $98,000. Rather than spending $98,000 on nursing home bills and only have $100,000 for the rest of his life, Sharon finds an attorney who specializes in elder law. There she learns that rather than spending the $98,000, Sharon instead can “convert” that $98,000 into a stream of income by purchasing the right Medicaid qualifying annuity. The result is that the annuity is not considered a countable assets, and John will be immediately eligible for Medicaid. The annuity will be a single premium immediate annuity, and it will start paying back Sharon each month a fixed amount for 3 or less years until Sharon receives back all of the original purchase price for the annuity. That means Sharon protects nearly all of her assets with this annuity. And because John is now eligible for Medicaid, his income will go to the nursing home and Medicaid will pay the difference. Sharon gets to keep all of her monthly Social Security and pension check, and all of her $100,000 for the CSRA plus as the annuity pays back to her she simply puts the check into the bank. Medicaid says that it’s ok for her total assets to climb above the CSRA limit after John is eligible for Medicaid.

There are two disadvantages to this annuity. First, it doesn’t pay much interest at all. But if the couple can save $5,000 per month once the ill spouse is eligible for Medicaid, that’s a fantastic rate of return in savings! Second, if Sharon dies before she receives back the full annuity, a portion of the annuity will need to go to the state of North Carolina to reimburse Medicaid for John’s cost of care.

Before purchasing an annuity for Medicaid planning, and before applying for Medicaid, you should consult with an attorney who thoroughly understands the Medicaid system and these rules by specializing in elder law.