Medicaid Asset Protection: Converting Coutable Spousal Resources into a Protected Income Stream Using Annuities

Our clients often ask how they can protect their assets from Medicaid in the event a spouse must enter an assisted living facility in the future. While the Medicare Catastrophic Coverage Coverage Act of 1988 allows a community spouse (the spouse who does not require the coverage) to preserve certain assets,, the community spouse may only retain up to $113,640 (this is known as the “Community Spouse Resource Allowance”). However, often Community Spouse Resource Allowances will be insufficient for the community spouses to maintain their current standard of living.

One method which can be used to increase the funds available to the community spouse is an annuity which converts funds into income for the community spouse. As the community spouse’s income is not considered when determining Medicaid eligibility, the funds which would have been countable are removed from the eligibility determination. Those funds no longer need to be spent down prior to applying for Medicaid.

For instance, suppose a New Jersey couple has $500,000 in assets. While a community spouse may be permitted to retain $113,640, the balance of the assets would need to be “spent down” before the spouse would be permitted to apply for Medicaid. However, if the assets are transferred to the community spouse and then the community spouse uses the funds to purchase a qualifying annuity, then the assets are no longer “countable” for Medicaid purposes. This is a permissible way to protect assets for two reasons: First, transfers to spouses are permitted under the Medicaid rules and are not subject to the 5 year “look back” rule and, second, the money used by the community spouse to purchase the annuity was spent to purchase something of equal value and are also not subject to the five year look back rules. As the community spouse’s income is not considered for purposes of Medicaid eligibility, the assets have effectively been converted into an income stream and protected for the use of the community spouse. This, of course, is subject to the community spouse’s Minimum Monthly Maintenance Needs Allowance restrictions. The income cannot exceed the allowed amount.

The annuity purchased must meet very specific criteria in order to successfully convert the asset into an income stream for the community spouse which will be disregarded by Medicaid:

1) The annuity must be a single-premium immediate annuity (known as a “SPIA”). This is generally defined as an annuity which is purchased by a lump sum payment and payouts to the community spouse begin immediately after the purchase of the annuity.

2) The annuity payout must end before the community spouse’s life expectancy ends.

3) The payouts must consist of substantially equal payments.

4) The annuity must be non-transferrable and irrevocable.

5) The annuity must be purchased from a commercial insurance company.

6) Medicaid must be the designated beneficiary of the annuity upon the death of the community spouse.

The elder care attorneys at McLaughlin & Nardi can assist you in determining if purchasing an annuity would be appropriate and to ensure that the annuity you purchase meets the requirements, contact us by telephone at (973) 890-0004, e-mail us or visit our website www.esqnj.com.