New Medicaid Annuity Rule Explained

A small but important change relating to Medicaid annuities was signed into law Dec. 20, 2006, as part of the Tax Relief and Health Care Act of 2006. It changed the word "annuitant" to "institutionalized individual" in the section of the federal statute that described annuities intended to be helpful for Medicaid planning.

So what does all this really mean? Essentially, if a spouse who is living in the community (the so-called "Community Spouse") purchases an annuity that meets all the requirements necessary to avoid having that purchase treated as a gift, that spouse must now name the state as beneficiary up to the amount of any Medicaid payments made on behalf of the "institutionalized individual" (instead of the "annuitant").

So who, exactly, is the "institutionalized individual"? Well, clearly if the Community Spouse purchases an annuity, the other spouse, who is in a nursing home, is the "institutionalized individual." As such, upon the death of the Community Spouse, if the annuity has not yet made its final payment, the state will be entitled to receive future annuity payments, up to the amount of the value of all Medicaid benefits it made and will make on behalf of the nursing home spouse.

Prior to this change in the law, repayment in the above situation would have been due only for nursing home expenses of the Community Spouse.

Example: Mary and Dan have $150,000 in assets. Mary lives in the community and purchases a $50,000 Medicaid annuity payable to her. Dan, who is in the nursing home, immediately qualifies for Medicaid, because: (i) the annuity itself does not count as an asset for Medicaid eligibility purposes, assuming it is correctly structured, and (ii) Mary's remaining assets are less than $101,640, the excluded amount for community spouses (although some states only allow Mary to exclude half that amount, most states allow exclusion of the full amount).

Two years later, Dan dies.

Results:

1. If the annuity pays out completely before Mary dies, then the new law makes no difference, since there is no remainder to go to the state. (This would typically be the case in so-called "half-a-loaf" planning, a topic for another day!)
2. If Mary dies before the annuity is fully paid out, then it will make a difference, because now Dan's costs must be repaid from the remaining annuity payments. Under the prior law only Mary's costs---if any---would need to have been repaid (and if Mary never went to a nursing home, then Dan's costs would never be recouped by the state).
3. If Mary enters the nursing home during the annuity payment period, those payments will go to the nursing home, since they are considered her income. If Mary then dies before the annuity is fully paid out, not only must Dan's Medicaid benefits be repaid to the state, but depending on how the new law is eventually interpreted, it's quite possible that Mary's Medicaid benefits must also be repaid out of future annuity payments.

Note that although this change was just signed into law, the law itself states that it is effective as if it were part of the original law that it is amending. Thus, it applies to all annuities issued after February 8, 2006, the date of enactment of the Deficit Reduction Act of 2005.

K. Gabriel Heiser is an attorney with over 25 years experience in elder law and estate planning. Heiser is the author of “How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets,” an annually updated practical guide for the layperson. For more information about this book, visit Medicaid Secrets. Read more about medicaid annuties at medicaid annuity.

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