FAQ: What does it mean for an annuity to be “Medicaid friendly”?

by Jerrold Bartholomew

It is very common to hear annuities described as “Medicaid friendly.” Most people hearing the words “Medicaid friendly” would assume that assets placed in such an annuity will be protected from the cost of long term care and indeed, they may even be told so by an insurance professional or financial advisor. But under Michigan law, an annuity by itself does nothing to protect assets from the cost of long term care. In fact, without careful planning, simply investing in a Medicaid friendly annuity may result in the unnecessary loss of assets. Understanding why this is the case requires some understanding of estate planning, elder law, and annuities. But taking the time to understand these things can easily save tens if not hundreds of thousands of dollars. Moreover, understanding these points can help you to see why your estate plan must work in conjunction with your financial plans in order to receive the full benefit of an annuity.

Estate planning is traditionally thought of as the field of law concerning the distribution of assets at the time of one’s passing. Modern estate planning encompasses planning not only for distribution on death, but also planning for disability and asset protection. Planning for disability will greatly increase the likelihood of having something to pass on to heirs, while at the same time reducing stress and maximizing one’s own independence. But in order to effectively manage a one’s affairs through a period of disability, there must be a close relationship between the estate plan and the financial arrangement, including the types of investments used.

Annuities can have many different features. Sorting them all out would be beyond the scope of this brief article, but it is important to note that without effectively combining the estate plan and the annuity, you cannot achieve the maximum benefit of either one. To understand why this is so, a few common features of annuities are worth mentioning.

Annuities can be either assets or income streams. When initially purchased, most annuities are like certificates of deposit with a longer term and a greater penalty for early withdrawal. Such annuities are assets and are said to be “deferred.” Money can be taken out of the annuity at this stage, but like a certificate of deposit, there will be a penalty or surrender charge imposed if the withdrawal is taken too soon.

Annuities can be converted into guaranteed income streams. Once this is done, the annuity no longer has any cash value, but will instead pay out a fixed sum of money on a regular basis for a period of time. This process is often called “annuitizing” the annuity. Once annuitized, the funds placed in an annuity can no longer be accessed. What has really happened here is that an asset, the annuity or cash used to purchase the annuity, has been converted into an income stream. This is a permissible form of spending down for Medicaid eligibility provided that the requirements of Medicaid law (described below) are met. An annuity that will meet these requirements is fairly described as “Medicaid friendly.”

According the Program Eligibility Manual (Section 401, pp.4-5) for the state of Michigan, an annuity must have several different characteristics in order to avoid being considered a divestment for purposes of Medicaid qualification, including:

  1. The annuity must be irrevocable and non-assignable;
  2. The annuity must pay out on an actuarially sound basis;
  3. The annuity must pay out in level installments;
  4. The state must be named as a remainder beneficiary to the extent of Medicaid benefits received.

Any annuity that does not comply with these rules will be considered a divestment and subject to penalty. But any annuity that does comply with these rules will go to pay the cost of nursing home care in two ways. First, the regular income from the annuity will have to be paid to the nursing home on a monthly basis. Second, if the owner of the annuity should pass away before the annuity has paid out the entire balance, the remainder would go the state to the extent that any assistance had been provided. The owner of the annuity will have to pay the entire nursing home bill sooner or later. Medicaid friendly indeed!

It is at this point that the need to consult with and elder law attorney regarding annuities becomes clear. Elder law is the practice of law related to serving the needs of senior citizens and their families. It often involves planning for health care costs and interactions with Medicaid and Veterans benefits. Medicaid law in Michigan and many other states has changed a great deal since the Deficit Reduction Act of 2005 was passed and this law has dramatically changed the meaning of “Medicaid friendly.” Great care must be taken under this new law to either avoid or carefully manage penalties for transferring assets and yet maximize the benefits available with annuities. Without proper planning, precisely because an annuity can be described as “Medicaid friendly” it would almost certainly have to be exposed to the cost of long term care. But a modern estate plan developed in consultation with an elder law attorney can avoid exposing funds placed in an annuity to the cost of long term care while still obtaining the other benefits of the annuity itself. Careful estate planning can render an annuity safe from spend down for Medicaid qualification and make it truly Medicaid friendly.

*Jerrold E. Bartholomew is a licensed attorney in the state of Michigan. He is not licensed for insurance products or securities.

Leave a Comment

Previous post:

Next post: