USING ANNUITIES IN MEDICAID PLANNING

by Thomas D. Begley, Jr., Esquire, CELA and Marianne Johnston, Esquire

Medicaid Planning

            The use of annuities in Medicaid Planning is a viable Medicaid Planning strategy.  Long-term care is expensive and one of the best ways to pay for it is through Medicaid.  Medicaid limits the countable assets of the individual Medicaid recipient to $2,000.  If the Medicaid recipient is married, the healthy spouse, known as the Community Spouse, may retain one-half of the couple’s assets subject to a maximum of $148,620 in 2023.  This amount is known as the Community Spouse Resource allowance (“CSRA”). The remaining funds must be spent down or transferred.  Transfers are subject to a five-year lookback and any gifting made during the five-year period results in the imposition of a Medicaid transfer of asset penalty.  By using a Medicaid-Compliant Annuity (“MCA”), an individual can hasten Medicaid eligibility by avoiding or reducing transfers and the attendant transfer of asset penalty.

History of Annuities and Medicaid Planning in New Jersey

            The Deficit Reduction Act of 2005 established criteria for an MCA.  Thereafter, the Center for Medicare and Medicaid Services (“CMS”), which has broad authority to define Medicaid eligibility, issued Transmittal 64 setting forth the requirements an annuity must satisfy to be considered a non-countable asset. The New Jersey State Medicaid agency (“DMAHS”) initially resisted the use of annuities in Medicaid planning by contending they were countable resources. For example, DMAHS denied a married applicant benefits because his spouse owned an MCA in an amount that was in excess of her allotted CSRA. In the same case, DMAHS argued the annuity was a countable resource because its income stream had a value and could be sold on the secondary market. In the case of F. K. v. DMAHS,[1] the court rejected both arguments holding the imposition of a CSRA cap on MCAs was inconsistent with the federal law and thus invalid and there was no evidence of a viable secondary market for MCAs. Several years later, DMAHS took the position that an MCA with a term shorter than 60 months was a countable asset.  This ruling rendered the purchase of an MCA useless because there would be no advantage to purchasing an annuity as opposed to simply transferring assets to a third party.  Five years of long-term care would have to be paid for in either event. DMAHS reluctantly reversed its position in the case of M.W. v DMAHS[2].  An annuity can now have a term as short as two months.

Medicaid-Compliant Annuity

            An annuity must satisfy five requirements to be considered not countable by Medicaid.  The annuity must:

1. be irrevocable;
2. be non-assignable;
3. be actuarially sound (which has been interpreted as having a term shorter than the annuitant’s life expectancy);
4. provide for equal monthly payments; and
5. name the State Medicaid Agency as primary beneficiary up to the amount the State pays out in benefits.

Medicaid Planning Strategies

            For a single individual, the Gift/Annuity strategy can be used to transfer assets at a reduced Medicaid transfer of asset penalty.  On March 20, 2023, DMAHS issued Medicaid Communication No. 23-04 which announced an increase in the penalty divisor to $384.57 per day.  Medicaid will now impose a one-month penalty for the transfer of approximately $11,697.34. Thus, if a single individual in a nursing home had $116,973.40 of assets and transferred them to a child, the penalty would be ten months of ineligibility for Medicaid.  However, if the parent transferred $58,486.70 to the child, the penalty would be five months.  The parent would retain the remaining $58,486.70 and purchase an MCA with a term of five months to pay for care during the penalty period.  These numbers are for example only.  The Medicaid applicant’s other income, cost of care, and available assets are considered when determining the amounts of the gift and of the MCA. The gift’s size determines the length of the penalty period which in turn determines the length of the MCA.  In these situations, the annuity will almost always be short-term.  The gift annuity strategy is only available for nursing home applicants.

            MCAs can be especially useful with a married applicant because Medicaid does not impose a penalty when assets are transferred between spouses.  If the couple has excess resources, rather than transfer them to a child and incur a Medicaid transfer of asset penalty, the Community Spouse can purchase an MCA and convert what would otherwise be a countable asset into an income stream for the Community Spouse, which is non-countable.  The Medicaid transfer of asset penalty is completely avoided.  Because of the lien requirement that the State Medicaid Agency be named as primary beneficiary, the health of the Community Spouse should be considered and, perhaps, an MCA for a term shorter than the Community Spouse’s life expectancy would be appropriate.  Even if the Community Spouse dies before the expiration of the term of the MCA, there could be a considerable saving.  For example, if the term of the MCA was five years but the Community Spouse died at the end of four years, the Community Spouse would have received approximately 80% of the money back.  The State is entitled to be repaid up to the amount it pays out in benefits.  The State pays only a portion of the private pay rate for care is so the payback would likely be less than the expenditure for care on a private pay basis.  This strategy can be used regardless of whether the Medicaid recipient is confined to a nursing home.

[1] F.K. v. DMAHS, 2005 W.L. 13252 (Jan. 4, 2005).

[2] M.W. v. DMAHS, NJ OAL Docket No. 2998-2013 (Jan. 28, 2014).