Medicaid planning with annuities is an asset protection that many families overlook. In these cases, some people may face critical need situations in which they need to find a way to become eligible for Medicaid immediately. One way to do this is to purchase a Medicaid compliant annuity to deplete countable assets, thus allowing the individual to become eligible.
Some families may not even be familiar with critical need asset protection using Medicaid annuities, so let’s first take a moment to explain what this really is. These people did not consider the future and never took the time to plan ahead. Often times, these individuals are going into a nursing home and will need some immediate assistance regarding Medicaid asset protection planning.
This is actually a common occurrence. In fact, more than 99% of individuals we speak with do not know much about Medicaid planning at all. To make things worse, about 95% of asset protection attorneys and financial planners are unfamiliar with this type of planning. So if few people are knowledgeable about Medicaid planning, what can an advisor or planner do when their client needs immediate Medicaid asset protection planning? There are a few options, including:
- Beg naiveté and admit to not knowing anything about Medicaid planning
- Inform their client that Medicaid planning is not needed and they should instead simply give in, be a “good” US citizen and fork out all their hard-earned money to the government.
- Call around and get a referral to an advisor who has the necessary information and can help plan for the client.
- Educate yourself about Medicaid asset protection to help your family or client.
How to Plan with a Medicaid Compliant Annuity
While this method will not solve all problems, it is a possible way for people to receive help when they are in urgent need for Medicaid assistance. The example below will explain how to use a Medicaid compliant annuity in a situation of urgent need. The Medicaid annuity in this case will not be considered to be a countable asset, so this may allow the individual to apply for Medicaid immediately and qualify.
Example of a Medicaid Compliant Annuity
Let’s use an example of a single 65 years old man. Mr. Ephraim currently has $75,000 in cash and owns his own home. Before he can apply for assistance, he will contribute his money into an annuity that is Medicaid compliant. This will allow him to qualify for assistance and his care will be paid for at a set rate from Medicaid. For Medicaid assistance, Mr. Ephraim can only have $2,000 in cash so, in this instance, he qualifies. We will say that Medicaid will pay $3,000 every month for his care since it will be at the reduced Medicaid price. We will also make the assumption that he is receiving $500 each month from Social Security.
Without Buying Medicaid Compliant Annuity
If Mr. Ephraim did not purchase the annuity, he would not have been eligible for Medicaid. If this were the case, his $75,000 would have been used to pay for nursing care in addition to using his Social Security checks of $500 per month. Based on the assumption that Medicaid care would have cost around $5,000 each month (he does not receive the Medicaid discount since he didn’t buy a Medicaid annuity), Mr. Ephraim would be eligible for Medicaid after a period of 16.5 months (16.5 x $4,500 = $75,000). $4,500 every month would be used from his $75,000 and $500 a month is paid by his Social Security. After his money is gone, he would then qualify for Medicaid, which would then pay only $2,500 each month towards nursing care. This amount is based on $3,000 (at the now Medicaid reduced price) for the cost of nursing care minus the $500 he receives in Social Security every month.
When Buying a Medicaid Annuity
When buying a Medicaid compliant annuity, Mr. Ephraim would immediately qualify for Medicaid. If we went further to assume that the annuity would produce $500 a month in income, the aid from the state would equal $2,000 a month. This is calculated as: $3,000 a month for nursing home costs at the reduced Medicaid price minus $500 of annuity income minus $500 from Social Security income = $2,000 paid by Medicaid aid.
Medicaid Estate Recovery with No Medicaid Complaint Annuity
Now, if Mr. Ephraim died in five years, the state would begin to look for Medicaid estate recovery. If he had no Medicaid annuity, the state would try to recover $108,750 from the assets of Mr. Ephraim’s home. This number is based on $2,500 in Medicaid assistance over a period of 43.5 months.
Medicaid Estate Recovery with Medicaid Complaint Annuity
With the Medicaid compliant annuity, the state Medicaid program spent $2,000 each month for a period of 60 months. So the Medicaid estate recovery would be $120,000. Recall that with the Medicaid annuity, Mr. Ephraim would have immediately qualified for assistance; therefore, he had 60 months of Medicaid aid. Recall, furthermore, $3,000 was the cost of nursing home and we minus $500 of annuity income and minus $500 of Social Security income = $2,000 of Medicaid assistance per month.
However, it is required that the state is required to pursue the annuity payments to be made entirely before they can touch other assets, such as Mr. Ephraim’s home. In this case, a life expectancy table is used to determine what is left for payments on the annuity. The life expectancy for Mr. Ephraim was 81.5. He died 11.5 years early, so this is what is owed on the annuity.
This breaks down to being 138 months. Take those months and multiply it by the annuity monthly payment of $500 and the total is $69,000 that will be paid to the state for Medicaid estate recovery that will come from the annuity directly.
So from the initial amount of $120,000, we will take away the $69,000 from the annuity. The amount remaining is $51,000. This is the amount by the state for the Medicaid estate recovery that will come from the assets of Mr. Ephraim’s home.
The end result is that the annuity saved the clients estate. Even though Mr. Smith spent his cash in the annuity, the final amount that was recovered from the total estate was $57,750 less ($108,750 paid from his home assets if he had no Medicaid compliant annuity minus $51,000 paid from his home assets if he had Medicaid annuity = $57,750). This is important information to know because these annuities are a way for clients to protect assets after they die.
For more information on Medicaid planning by purchasing a Medicaid annuity please call us Estate Street Partners at (888) 429-0011 or if calling in the Boston, MA, please call (508) 429-0011.
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