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Annuities and long-term care planning for a single person

Annuities and long-term care planning for a single person

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Medicaid-compliant annuities are a great planning tool for single persons, as well as married couples. The key is to work with a financial professional, who either specializes in the use of Medicaid-compliant annuities or partners with a Medicaid-compliant annuity specialist. In addition, it is essential that you and your financial professional work with an elder law attorney, who can make sure the financial plan is consistent with your goal of qualifying for governmental benefits to help pay for long-term care.

A Medicaid-compliant annuity is quite different from annuities sold by most financial professionals. The an-nuities sold by most financial professionals, generally speaking, are designed to grow your investment and/or generate income for a period of time. If the funds you invest into the annuity are retirement funds, these traditional annuities defer income tax on the interest earned on the investment until the annuity owner begins withdrawing funds from the annuity.

Medicaid-compliant annuities, on the other hand, are not designed to maximize earnings or defer taxation. Instead, they are designed to help protect at least half, maybe more, of what you have accumulated, all of which would otherwise be at risk of loss to a nursing home or other long-term care costs.

Only a limited number of insurance companies offer Medicaid-compliant annuities for long-term care planning. They know the Medicaid laws, rules and regulations, which are much different from the laws that apply to tradi-tional annuities; thus, they know how to design and structure Medicaid-compliant annuities.

When single people enter nursing homes, they must either spend down their assets to no more than $2,000 or take action to protect a portion of their assets, so they can qualify for Medicaid benefits to pay the nursing home bill. In this context, take action means rearranging the person’s financial affairs, much like a well-to-do person would do in order to reduce or eliminate death taxes. For single people, who are of modest means and facing the possibility of needing care in a nursing home, it means rearranging their financial affairs to protect their home or farm and their lifetime savings. (Strategies to protect the home or farm are beyond the scope of this article.)

For a single person, a Medicaid-compliant annuity is designed to convert approximately half of the person’s assets into an income stream. The other half of the person’s assets are transferred either to one or more trusted family members or to a trust. In either case, the assets are invested into a more traditional type annuity. With the income from the Medicaid-compliant annuity covering payment of long-term care costs during the penalty period (which is created by the transfer of half of the assets to the family member(s) or trust), the nursing home resident can become eligible for Medicaid benefits to pay the nursing home bill upon expiration of the penalty period or five-year look-back period, whichever comes first.

Note that the foregoing is the short version; do not attempt to do it on your own. The coordination of the Medicaid-compliant annuity and the more traditional type annuity must be precise. The mathematical calculations must be exact; merely $1 off on the calculations will run afoul of the new Illinois Medicaid rules.

When the person needs help in order to remain at home or transition to a supportive living facility, the same strat-egy can work to obtain VA, Medicaid or Community Care Program benefits.

When the person is a war-time veteran or the widow(er) of a war-time veteran, a similar strategy can be used to help the person obtain VA benefits. The VA benefits can rise to $20,446 per year for a single person. If the person is the surviving spouse of a veteran, the yearly VA benefits can be as much as $13,136 per year, depending on the level of care needed. If the plan is structured just right, these benefits can be used to hire someone (even family members) to help the person remain at home or pay for care in an assisted or supportive living facility.

The following is an example of how a properly structured Medicaid-compliant annuity would work for a single person, who is not a veteran or the surviving spouse of a veteran.

Assume that Mrs. Smith, a widow, is a resident of a nursing home in Illinois and that the monthly fee is $5,000. For purposes of this hypothetical, assume she has monthly Social Security income of $800 and that her spend-down amount is $100,000 (i.e., the amount in excess of $2,000 which disqualifies her from receiving Medicaid benefits to pay the nursing home).

Since Mrs. Smith is paying $5,000 per month for her care, and with her income being only $800, her monthly income shortfall is $4,200. With the monthly income shortfall amount of $4,200 then being added to the $5,000 monthly cost of care, the total burn rate amount equals $9,200. With this amount then being divided into the $100,000 spend-down amount, the resulting figure is 10.87 months.

This figure then gives us the portion of the $100,000 that can be transferred to trusted family members or to a trust. By multiplying the $5,000 monthly cost of care by 10.87, the gift amount equals $54,350. This sum is in turn invested into an annuity that is designed to grow in value.

With the $100,000 spend-down amount being reduced by the gift amount of $54,350, the remaining sum of $45,650 is used to purchase a short-term Medicaid-compliant annuity, By using a Medicaid-compliant annuity, structured for a period certain of 11 months consistent with the new Illinois DRA-compliant Medicaid rules, the Medicaid-compliant annuity will pay Mrs. Smith $4,160 per month, for a total pay-out of $45,760.

Mrs. Smith will be ineligible for Medicaid benefits until the end of the 10.87-month penalty period. However, dur-ing the same period, Mrs. Smith will have total monthly income of $4,960, which is available to pay the monthly nursing home costs. Since the nursing home charges $5,000, and Mrs. Smith’s income is only $4,960, she would have a monthly income shortfall of $40. This sum would be covered by pulling the amount from the $2,000, which Medicaid allows her to retain.

If Mrs. Smith decides to not use the strategy discussed in this article, she will need to privately pay for approxi-mately 23 months until she has exhausted all of her assets except for $2,000. By using the strategy described, Mrs. Smith will protect $54,350 — a little more than half of her $100,000 spend down. Further, in the event that Mrs. Smith dies before the 10.87-month penalty period expires, Medicaid will not be entitled to any of the residual benefits remaining in the 11-month Medicaid-compliant annuity because no medical assistance benefits will have been provided to Mrs. Smith. Consequently, in such an event, Mrs. Smith’s beneficiaries will receive any residual benefits remaining in the Medicaid-compliant annuity.

Note: The use of Medicaid-compliant annuities for married couples was discussed in this column last month., at page 14. In future months, we will explore the use of annuities as a means of qualifying for VA benefits, while also protecting the bulk of the family’s lifetime savings.

RICHARD HABIGER is author of the Illinois edition of “How to Protect Your Family’s Assets from Devastating Nursing Home Costs: Medicaid Secrets.” He is an elder law attorney, who focuses on asset protection, Medicaid and VA benefits. You may contact him at 618-549-4529 or


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