Should mom buy a Medicaid-compliant annuity?


Q. My mother is lives in a memory care facility in Bergen County. She is widowed and has liquid assets in the moderate six-figures with a small mortgage-free home valued in the low six figures. Can a Medicaid-compliant annuity be structured so that she has Medicaid funds for a nursing home at the point her money runs out?
— Caring child

A. Let’s start with the basics.

An annuity, in general, is a financial product that gives a fixed stream of payments to an individual in the form of income.

As you know, your income means everything for Medicaid eligibility.

Medicaid-compliant annuities can be a great way to convert otherwise countable assets to a non-countable income source if payments are within Medicaid income guidelines, said Geraldine Callahan of Callahan Financial Services in East Hanover.

“Payment from a Medicaid annuity is countable only as income,” Callahan said. “These types of annuities are fixed and immediate and pay a monthly payout similar to pension and Social Security checks.”

There are specific rules that must be followed for something to qualify as a Medicaid-compliant annuity.

Callahan said the Medicaid annuity must be irrevocable, which means once purchased, no changes can be made to the terms, nor can one get their money back.

It must be actuarially sound. This means annuity cannot pass the life expectancy of the annuitant, or in other words, annuity payments cannot exceed the lifetime of Medicaid applicant, Callahan said.

The annuity must be non-transferable, meaning that you cannot transfer or assign the ownership and you cannot sell it.

“It is important to remember that income from the annuity combined with other income cannot exceed Medicaid income limits,” she said. “In an income cap state like New Jersey, funds exceeding Medicaid income limits can go into a qualified income trust for eligibility purposes. Monthly payments must be used to pay the nursing home.”

Callahan said Medicaid annuities are less of a benefit for a single individual in a nursing home because he or she would still have to use the monthly income generated from the annuity to pay the nursing home.

If your mother is considering making a transfer or a gift, in the right circumstance, purchasing an annuity will begin an ineligibility period caused by the gift, she said. Income from the annuity can be used to help pay for long-term care during the Medicaid penalty period that resulted from the transfer or gift. In such cases, the annuity is usually short-term, just long enough to cover the penalty period, she said.

Callahan said it’s important to define your goal in purchasing the Medicaid-compliant annuity.

“If your mother has sufficient funds to pay for her care privately, it may not make sense to put her assets into a Medicaid-compliant annuity unless there was a gifting strategy involved, or if your mother was married and looking to provide income for the healthy spouse, it may not make sense given the scenario you mentioned,” Callahan said.

She recommends you speak to a competent attorney about your options, especially because there is also a home involved.

“Once on institutional Medicaid, generally, a single individual cannot have more than one primary residence, and the house may need to be sold, further disqualifying your mother from Medicaid because her current six-figure assets and funds from the sale of her home would exceed the guidelines,” Callahan said.

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