The Use of Annuities in Long-Term Care Planning
Copyright: Cohen & Oalican, LLP Introduction While immediate annuities can be important tools in Medicaid planning for married couples when one spouse needs long-term nursing home care, if purchased at the wrong time, or with the wrong terms, their benefit can be greatly reduced or eliminated. And in some instances better planning options may be available to the couple. In order to be eligible for Medicaid (a/k/a "MassHealth"), the applicant has to become "impoverished" under the program's guidelines, which limit the nursing home resident's "countable" assets to $2,000 and his or her spouse to $109,560 (2010 figures) (with some exceptions, discussed below). Annuities allow a couple to reduce their excess countable assets above $109,560 into an income stream for the community spouse, which is not countable. The ill spouse qualifies for Medicaid at the moment the annuity purchase becomes final. This report explains (1) the situations in which immediate annuities provide the greatest benefits to clients and (2) the Medicaid requirements regarding the form of the annuity. Since these rules are complicated and subject to change, we recommend that the client consult with one of our attorneys prior to taking any Medicaid planning steps. The Community Spouse Resource Allowance The Medicaid rules attempt to avoid impoverishment of the spouse of a nursing home resident, known in the Medicaid rules as the "community spouse," by preserving income and resources for her use after the nursing home, or "institutionalized," spouse becomes eligible for Medicaid. In Massachusetts, the community spouse can keep up to $109,560 (in 2010). This is called the "community spouse resource allowance," or "CSRA," and is adjusted each year for inflation. Any assets above the CSRA (plus $2,000) must be spent down in order for the nursing home spouse to qualify for Medicaid. The determination of the couple's total assets and the CSRA are based on their holdings on the date the ill spouse is "institutionalized," the date he moves to a hospital or a nursing home. A couple may reduce their assets to the CSRA by using their excess assets for the benefit of the community spouse. For instance, a couple may have $190,000 in countable assets on the date the husband moves to a nursing home. In Massachusetts, the wife will be limited to a CSRA of $109,560 (let's say $110,000 for the purpose of this example). In this case, she can take the excess of $80,000 ($190,000 - $110,000 = $80,000) and purchase an immediate annuity for her own benefit, making her husband eligible for Medicaid. The purchase of an annuity by a community spouse in order to qualify an ill spouse for Medicaid will not jeopardize the ill spouse's eligibility for Medicaid. The community spouse may receive the increase in income from the annuity without it being deemed available to the institutionalized spouse. Form of the Annuity The Centers for Medicare and Medicaid Services ("CMS"), the federal agency which governs the Medicaid program, mandates two conditions an annuity must meet so that its purchase is not considered an impermissible transfer of assets. First, if the annuity has a term certain -- a guaranteed number of years of payment -- it must be shorter than the annuitant's life expectancy, as determined by life expectancy tables provided by the Social Security Administration. The annuity may be for life with a term certain or for life alone; but if it has a term certain longer than the annuitant's life expectancy, a portion of the purchase price will be considered a transfer to the named remaindermen. For example, according to the Social Security Administration life expectancy tables, an 80-year-old woman has a nine-year life expectancy. She can safely purchase an annuity with a term certain for nine years. If she purchases an annuity with a longer term certain, a proportionate share of the annuity purchase price would be deemed a transfer to the annuity's remaindermen. For instance, if she were to purchase a $80,000 annuity with a 10-year term certain, she would be deemed to have transferred the deemed value of the remainder interest calculated as follows: (10-9) ? 10 x $80,000 = $8,000. In that case, she would be ineligible for Medicaid benefits for approximately one month (In Massachusetts, a person is not eligible for nursing home Medicaid benefits one month for every roughly $8,000 that is given away). Second, the money paid back by the annuity over the life expectancy of the annuitant must be equal to or greater than the amount initially paid for the annuity. In other words, if the annuitant has a six-year life expectancy and purchases an annuity for $100,000, it must pay out a least $1,388.89 a month ($100,000 ? (6 x 12)). If, for instance, the annuity only paid $1,200 a month, the difference of $13,600 ($188.89 x 72) would be considered a transfer. The Office of Medicaid (the "OM") is the agency which governs the Medicaid program in Massachusetts. The OM imposes several additional conditions so that the purchase of the annuity is not a disqualifying transfer of assets. Satisfaction of these additional requirements relates to the identity of the beneficiary and whether the purchaser of the annuity is the institutionalized applicant or the community spouse. With exceptions for minor or disabled children, a single person applying for Medicaid must always name the state as the primary beneficiary up to the amount of medical assistance paid on behalf of the institutionalized person. If the community spouse purchases the annuity, then the state must be named as the secondary after the institutionalized spouse or children. When all conditions are met, the annuity effectively transforms excess capital, which is countable, into an income stream, which is not countable in determining an ill spouse's Medicaid eligibility. Satisfying the CMS and state conditions is important otherwise the annuity purchase may be deemed a transfer of assets. The Medicaid rules penalize transfers of assets by imposing a period of ineligibility, the length of which depends on the amount transferred and the average cost of nursing home as determined by the OM. An error in the purchase can cause an unexpected period of ineligibility for the Medicaid applicant. Increased CSRA Option Medicaid also sets a minimum income standard to which the community spouse is entitled while the ill spouse is receiving Medicaid benefits in the nursing home. This is called the "minimum monthly maintenance needs allowance," or "MMMNA," and ranges between $1,822 and $2,739 a month (in 2010), depending on the community spouse's housing costs. Where the community spouse's own income is less than the MMMNA, she is entitled to a share of the nursing home spouse's income to make up the difference. For instance, if the community spouse's income is $1,000 a month, including investment earnings on her CSRA, and her MMMNA is $1,800, she may receive $800 from her ill spouse. The balance of his income (less certain small deductions) must go to the nursing home to help defray the state's costs. If the community spouse's income is still below her MMMNA even after taking a portion of the ill spouse's income, then the Medicaid rules permit the community spouse to increase her CSRA in order to receive additional assets which can generate income. By increasing income, an annuity may adversely affect a community spouse's ability to seek an increase in the CSRA. This is only true for lower-income community spouses with high monthly expenses (as with the of the community spouse residing in an assisted living facility). Simply put, if their income needs are satisfied by the annuity, there is no need to increase the CSRA to provide more income generating assets for the community spouse. The question is whether couples in these circumstances would be better off with an annuity or an increased CSRA. What About Annuities for Single Individuals? A question often raised has to do with purchasing immediate annuities for single individuals facing an extended nursing home stay. As discussed above, the annuity often makes sense for a couple as a Medicaid-qualifying strategy. However, does it make sense for a single person? The answer depends largely on the actual life expectancy of the annuitant. Returning to an earlier example, an 80-year-old woman has a nine-year life expectancy according to the applicable tables. She can purchase an annuity with a term certain of nine years or less. Assume she has $102,000. She can "annuitize" $100,000 and purchase an annuity of nine years of less. She will qualify for Medicaid benefits once the annuity is purchased as long her remaining assets do not exceed $2,000. During her life, she will receive monthly income of approximately $925 ($100,000 ? 108 months = $925). However, this monthly amount will go to the nursing home as part of her contribution to the cost of her care. In addition, she must name the Commonwealth of Massachusetts as the primary beneficiary of the annuity should she pass away prior to receiving all of the payments. In that case, the OM receives the rest of the payments up to the amount it paid on behalf of the Medicaid recipient. Any payments remaining after the state is reimbursed can be paid to secondary beneficiaries, such as children. So what's the advantage of purchasing the annuity? There is none unless the annuitant dies prior to receipt of the last annuity payment AND the state's expenses are less than the remaining annuity payments. In that case, the secondary beneficiaries (again, often the children) will receive the remaining payments after the state is paid back in full. In short, this strategy only makes sense if the annuitant's actual life expectancy is significantly less than the term of the annuity according to the Social Security tables. In the example of the 80 year old woman with a life expectancy of nine years, she may consider purchasing the annuity if she were terminally ill with a real life expectancy of significantly less than nine years. If she died in year one of a nine year annuity, the OM would receive all of the remaining payments up to the amount it cost to pay for her care for one year. Once the state is reimbursed in full, the remaining payments would go to the children. Because the state pays a nursing home less than a private pay rate, the OM lien on the remaining annuity payments could be less than if the person simply paid privately for the remainder of her life. The savings is the difference between the state rate and the private rate. What About Purchasing a Deferred Annuity in Advance? Some financial planners recommend to their clients that they purchase a deferred annuity in advance so that they will be prepared to annuitize in the event of nursing home placement. We recommend against doing so. Deferred annuities make sense for younger clients who have used their 401(k) or other retirement plans to the extent possible and would like to set aside additional funds for retirement. They will invest for enough years that the compound returns on the deferred taxes can make a big difference by the time they retire. Older clients do not have enough years before they may need the funds for this to provide a significant benefit. In addition, if they are not working any more they are likely to be in a lower tax bracket, further diminishing the advantage of deferred taxation. If an immediate annuity makes sense at a later date, there's no restriction on their purchasing one at that time. In short, there's no advantage to investing funds in a deferred annuity ahead of time as part of a Medicaid qualifying plan. But there is a disadvantage. Deferred annuities typically carry penalties as high as 12 percent for withdrawals made within the first few years of investment. If the annuitant needs the funds to pay for care, whether at home or in a nursing home, the penalty may come at the worst time possible. Conclusion In most states, including Massachusetts, annuities are excellent Medicaid planning tools for healthy spouses seeking coverage of long-term nursing home care for an ill spouse. (Beware, Medicaid regulations vary by state with some states prohibiting or severely restricting the use of annuities as a Medicaid-qualifying strategy). In most instances annuities should not be purchased until an ill spouse enters a nursing home. Annuities benefit lower-income community spouses less since an increased income stream may prevent the spouse from receiving additional assets above the standard resource allowance. A broker should be aware of the state in which the community spouse lives. Adverse consequences may result from purchasing an annuity in an "income-cap" state. Finally, a broker must recognize the importance of selling an annuity which meets the CMS requirements if the client applies for Medicaid in the future. When in doubt regarding any of these issues, it is prudent to contact a qualified elder law attorney before the sale is made.