Using Immediate Annuities to Protect the Spouse of a Nursing Home Resident

 In Long-Term Care Planning

Photo by Brett Meliti on Unsplash

The purchase of an immediate annuity can be an ideal planning tool for the spouse of a nursing home resident. For single individuals, they are less useful. In its simplest form, an immediate annuity is a contract with an insurance company under which the consumer pays a sum of money to the company, which sends the consumer a monthly check for the rest of his or her life, or for a set period of time. In most states, the purchase of a properly-structured annuity is not considered to be a transfer for purposes of eligibility for Medicaid, but is instead the purchase of an investment. It transforms otherwise countable assets into a non-countable income stream for the community spouse. As long as the income is in the name of the community spouse, it’s not a problem since there is no limit on the community spouse’s income.

In order for the annuity purchase not to be considered a transfer, it must meet four basic requirements: (1) It must be irrevocable; you cannot have the right to take the funds out of the annuity except through the monthly payments. (2) You must receive back at least what you paid into the annuity during your actuarial life expectancy. For instance, if you have an actuarial life expectancy of 10 years, and you pay $60,000 for an annuity, you must receive annuity payments of at least $500 a month ($500 x 12 x 10 = $60,000). (3) If you purchase an annuity with a term certain (see below), it must be shorter than your actuarial life expectancy. And (4) the state must be named the remainder beneficiary up to the amount of Medicaid paid on the annuitant’s behalf.

You can purchase an immediate annuity that will pay for as long as you live, whether that’s one more month or three more decades, or one with a term certain – a guaranteed payment period, such as five years, no matter how long you live. With a term certain annuity, if you die before the end of the term, the future payments will be made to whomever you name as beneficiary.

Immediate annuities are a very powerful tool in the right circumstances, but of little or no use in others. They must also be distinguished from deferred annuities, which have no Medicaid planning purpose. The use of immediate annuities as a Medicaid planning tool is under attack in some states and in all states, the annuity must satisfy specific requirements. Be sure to consult with a qualified elder law attorney in your state before pursuing this strategy.

                Case Study

After Mr. White moves to a nursing home, Mrs. White tallies the couple’s countable assets and finds that they total $200,000. Her community spouse resource allowance will be about $120,000. Mrs. White takes the other $80,000 and purchases an immediate annuity that will pay her $800 a month for the rest of her life, or for 10 years, whichever is longer. She then applies for Medicaid coverage of her husband’s care, qualifying him for immediate coverage.

The only drawback to this approach is that more of Mr. White’s income will have to be paid to the nursing home. Since Mrs. White’s income will be increased by the monthly annuity payment, she will no longer have a right to a share of Mr. White’s income to supplement hers and bring it up to her minimum income allowance as determined by the state. However, this is a small price to pay for guaranteeing that Mrs. White will receive the increased income for the rest of her life, no matter how long she survives Mr. White.


Related Articles:

Medicaid and Trusts

How the Community Spouse Can Keep More Assets

Spending Down for Medicaid Eligibility

Showing 2 comments
  • Michael Gregory

    Hi Harry,
    I learned through your wonderful question and answer website that the state of Massachusetts will put a lien on your home if the deed is transferred as a result of a death. Further, that this action triggers the question from the department of revenue regarding your liability for the Massachusetts Estate. I am also being told that if you place your home into a properly drafted Nominee Trust it will avoid this Lien as the true owner of the property in not identified in the trust. Is this correct? Thank you –

    • Harry Margolis

      No and possibly. Property in trust is subject to the Massachusetts estate tax just like any other property owned by the decedent. Real estate in trust is subject to the estate tax lien and any buyer will want proof that it’s been released. That said, nominee realty trusts are often misunderstood and misused. It may be possible to convey property in such a trust without a release of lien since the identity of the deceased owner may be concealed. However, even if the lien may be avoided, it would be fraud for the personal representative of the decedent’s estate not to include his or her interest in the nominee realty trust on the Massachusetts estate tax return.

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