The winds are finally changing for Medicaid recipients, as evidenced by a recent U.S. Court of Appeals ruling that eases state-imposed restrictions on the use of annuities, reducing the need for your clients to spend down assets in order to become eligible for Medicaid assistance. The 6th Circuit ruling shut down the state’s attack on Medicaid-compliant annuities in this case, ruling in favor of clients who rely upon these annuities to provide sufficient income even if one spouse requires Medicaid assistance to pay for long-term care in a nursing home.
Based on this precedent, your clients may begin to experience a much more favorable Medicaid planning environment as they gain greater flexibility in the purchase timing and beneficiary designation requirements for annuity contracts that escape the Medicaid resource calculation formula, without jeopardizing an unhealthy spouse’s Medicaid eligibility.
Medicaid-Compliant Annuity Basics
Medicaid-compliant annuities are typically useful in situations where your client is married and the two spouses are in unequal health positions. They serve to ensure the healthy spouse—known as the “community” spouse—has sufficient income, while allowing the second, less healthy, spouse to qualify for Medicaid assistance in paying for long-term care expenses, typically within a nursing home.
Rather than treating the purchase of the annuity as an impermissible transfer of assets in order to meet Medicaid’s means-tested eligibility requirements, the federal Deficit Reduction Act (DRA) treats the purchase as a permissible investment, and the annuity payout stream as shielded “income” of the community spouse. This technique allows the community spouse to use funds in excess of the Medicaid-permitted resource allowance to purchase an annuity that provides additional income for the remainder of his life expectancy.
Despite this, many states have attempted to add qualification requirements for these annuities that are not specifically required by the DRA, making it much more difficult for clients to qualify for Medicaid assistance.
The Medicaid Compliant Annuity Controversy
In Hughes v. McCarthy, the most recent challenge to the use of annuities in Medicaid planning, the Ohio Medicaid agency attempted to treat the purchase of the annuity as an impermissible transfer of assets (for less than fair market value) that was subject to penalty—and caused disapproval of the institutionalized spouse’s Medicaid application—because it was purchased after the date that one spouse entered a nursing home but before his Medicaid eligibility was determined.
The community spouse purchased an immediate single premium annuity after four years of paying her husband’s nursing home expenses, naming the husband as contingent beneficiary and the state Medicaid agency as remainder beneficiary. The state Medicaid agency challenged both the timing and the naming of the institutionalized spouse as contingent beneficiary.
Fortunately for clients, the U.S. Appeals court disagreed, finding that the state is not permitted to impose more restrictive requirements than the federal statute, which does not restrict the annuity purchase to the time period before one spouse enters a nursing home. Further, the court found that, as long as the community receives no more than the amount invested in the contract, plus interest, for a period based on his life expectancy, the institutionalized spouse may be designated as contingent beneficiary.
The Details: Ensuring Compliance
In order to qualify as a Medicaid compliant annuity under the DRA, the terms of the annuity contract must satisfy certain criteria. The income from the annuity contract must be payable to the community spouse, the contract must be irrevocable, and the payment term must be based on the life expectancy of the community spouse.
This is because, in a situation where one spouse requires long-term care and the other remains in the community, the assets of the community spouse are counted—up to a certain level—in determining whether the institutionalized spouse qualifies for Medicaid, but the income of that spouse is not counted.
Further, the state must be named as the remainder beneficiary on the contract, allowing it to receive up to the amount that it has paid for the institutionalized spouse’s long-term care.
While many states have attempted to impose additional restrictions upon the purchase of Medicaid-compliant annuities, the courts have finally begun to strike these restrictions down, easing the path for clients to secure sufficient income while simultaneously meeting Medicaid’s means-tested eligibility requirements.
For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s Summit Business Media partner, National Underwriter Advanced Markets, for a free trial.
You may also be interested in signing up for a free trial with another Summit Business Media partner, Tax Facts Online.