January 2001
Elder Law: New Medicaid Rules on Annuities

Last July I discussed the issue of Medicaid and Annuities. Since that time, Medicaid has made changes to its policies regarding annuities. These changes take effect on January 1, 2001. Although annuities are not widely used, it may be helpful to those who are considering annuities as a way to protect assets and to provide for their long-term care.

First, we need to briefly review annuities as they relate to eligibility for Medicaid. Remember, Medicaid is not Medicare. Medicare does not pay for a stay in a long-term care facility. That is the role of Medicaid, provided that an applicant’s liquid assets do not exceed $2,000.

In reviewing the assets of the applicant, Medicaid examines all transfers of the applicant within the prior three years (five years if transferred to a trust). The purchase of an annuity is a transfer that must be reported and examined by Medicaid.

Annuities are an alternative to long-term care insurance. They are, in essence, a savings program with guaranteed payments during your lifetime. Annuities may be purchased over a long period of time or in a lump sum at one time.

An important consideration when purchasing an annuity, is whether the annuity conforms to the requirements of Medicaid. It is important to ensure that you will not be denied eligibility for Medicaid assistance should you need it.

If the annuity is actuarially sound and the payments from the annuity are made to you or your spouse or your qualified child (a minor, blind, or disabled), Medicaid will not deny you eligibility for assistance. To be actuarially sound, the annuity must guarantee payments during your life expectancy and not any longer.

For a single female 65 years of age, annuity payments must be only guaranteed for a period of 18.96 years. If payments extend beyond that period, the annuity will not be entirely exempt for Medicaid purposes.

The first change in the Medicaid rules affects the source of the annuity. To be an exempt annuity for Medicaid purposes, it can no longer be purchased from family members or friends. Under the new rules, annuities must only be purchased from a life insurance company, a bank, or other commercial company that sells annuities as part of their normal course of business. Otherwise, the purchased annuity will be considered a transfer of assets and most likely will cause denial of Medicaid benefits.

The second important change relates to the total monthly income of the spouse who is not in or going into a long-term care facility. Medicaid uses the term “community spouse” to designate the spouse who remains at home.

The monthly income from the annuity is added to all other income of the community spouse. If the combined income of the community spouse from all sources, including the annuity, exceeds Medicaid’s “minimum monthly maintenance needs allowance,” part of the annuity will be counted as an asset to determine Medicaid eligibility.

Currently, Medicaid’s minimum monthly maintenance needs allowance is $1,407. Assume the community spouse receives $1,000 monthly from Social Security and $500 monthly from an annuity. The total income would be $1,500, or $93 more than allowed by Medicaid for the community spouse.

Medicaid would then consider that part of the annuity which caused the excess, being $93, to be a countable asset for the spouse in the long-term care facility. This is done by calculating the percent that $93 represents to the total annuity payment of $500, or 18.6% in the foregoing example. This percent is then applied to the total amount of the annuity purchase. The resultant calculation is then counted as an asset of the applicant, if such transfer occurred within the prior three years.

Staying with the foregoing example, the cost of an annuity which generates $500 for a period of 18.96 years is $70,000 at an interest rate of 5.55%. The amount of such cost that Medicaid will exclude is $13,020, based on the 18.6% calculation above. That is, Medicaid considers that $13,020 of the annuity’s purchase price contributes $93 in excess of the Medicaid’s “minimum monthly maintenance needs allowance.”

The reader should be aware that other Medicaid rules also apply in determining eligibility for Medicaid benefits. Before purchasing an annuity, it is best to contact an Elder Law Attorney. To locate an Elder Law Attorney, check with the National Academy of Elder Law Attorneys at (520) 881-4005, or your local Yellow Pages.

YOUR QUESTIONS: Do you have a particular question that you would like answered? To better serve the readers of the Utah Spirit, please direct your questions in writing to Michael A. Jensen, Elder Law Attorney, PO Box 571708, Salt Lake City, Utah 84157-1708, or by e-mail at: mike-spirit@utahattorney.com. From time to time, I will attempt to answer some of those questions.