In order to qualify for Medicaid, a single individual cannot have more than $2,000 in countable assets, and a couple cannot have more than $101,540. Any excess must be either spent down until it's gone (not generally the best alternative), gifted (which causes a costly period of Medicaid ineligibility), or converted to a non-countable asset. One example of a non-countable asset is known as a "Medicaid annuity."

Using an Annuity for Medicaid Planning

An annuity is a regular stream of payments back to you, in exchange for a lump sum of money. It can be either a private arrangement (made between you and a family member) or commercial (made with an insurance company). Medicaid only allows commercial annuities.

For example, if you are a male, age 70, you could transfer $50,000 to an insurance company in exchange for a monthly annuity payment of $400, guaranteed for your life, no matter how long you lived. But what if you died unexpectedly after two years? The annuity payments would stop. Most people do not like that, and therefore will typically purchase the annuity with a "guarantee period" of at least a certain number of years.

According to the Medicaid rules, a male age 70 has a life expectancy of 12.8 years. So you cannot purchase an annuity with a guarantee period that exceeds 12.8 years without causing a period of disqualification from Medicaid. So let's stick with 12.8 years to be safe. Because you are guaranteed payments for the longer of your life expectancy or 12.8 years, the monthly payments will be lower. In this example, they drop from $400 to $354 per month.

So why would anyone do this? What if you are in a nursing home and have $50,000 too much in the bank. You could purchase one of these annuities and immediately qualify for Medicaid without having to spend down the $50,000. The $354 will have to be paid to the nursing home each month, and Medicaid will pick up the difference. Under new laws that became effective Feb. 8, 2006, the state will have to be named as the beneficiary of the annuity up to the amount of Medicaid benefits it paid on your behalf, during your lifetime.

If you live to your full life expectancy and then die, the annuity payments will stop, and the state will be unable to receive any reimbursement. But what if you happen to die after 2 years? In that case, the annuity payments will continue for the balance of the guarantee period, but must first go to the state until your Medicaid "bill" is fully paid. After that, if any payments are still to be made, they can pass to your family members.

So if the Medicaid "bill" is for two years of Medicaid coverage, it could easily be in the amount of $96,000 (assumes $4,000/month). Since that exceeds the value of the annuity, the state will receive all of the remaining payments and your family will get nothing.

As you can see, using the entire amount of excess funds to purchase a Medicaid annuity for a single individual rarely makes sense. However, in order to be sure, you simply must "run the numbers."

  • How much money is there to invest in the annuity?
  • What is the age of the nursing home resident?
  • What is the expected life expectancy of the resident?

Once you know those factors, you can try different scenarios and see whether or not it makes sense to purchase the annuity. If not, then other Medicaid planning techniques should instead be considered.

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Gift-Giving and Penalties

Let's take another look at how you can use Medicaid annuities. Say you're single and in a nursing home, and you have about $100,000 of "excess" assets. What can you do to qualify for Medicaid coverage of your nursing home expenses? You can certainly give everything away, but that would cause you to be ineligible for Medicaid for many months—the so-called "penalty period."

For example, if you gave away $100,000, to calculate the penalty period you must divide the amount of your gift by your state's "penalty divisor." This penalty devisor is based on the average cost of a nursing home in your state, and it is usually updated annually. So, if your gift is $100,000, and the divisor is $5,000, then you will incur a penalty period of $100,000/$5,000 = 20 months.

This means if you gifted the full $100,000 to, say, your children, you'd be faced with no Medicaid coverage of your nursing home expenses for 20 months, based on our assumptions above. Well, who is going to pay for you for that 20-month period? That's right, the kids! And it may well take the entire $100,000 you just gave them to cover your expenses for the penalty period, leaving the kids with nothing at the end! So much for that approach. Instead, you should consider the "half-a-loaf" approach.

The "Half-a-Loaf" Approach: Gifts and Annuities

Instead of giving away 100 percent and winding up with nothing for your family members as explained above, you give them 50 percent now and keep the other 50 percent. But if you stop there, you won't qualify for Medicaid because you have too much money. Remember, you can only have $2,000 in countable assets, not $50,000!

You would have to spend that $50,000 on your care until it's gone, and then you can apply for Medicaid. But at that point you would find out that the gift you made 10 months ago counts against you (as do all gifts made within 5 years of your application, as a general rule). Once again, your kids would be forced to pay for you until the $50,000 you gave them is gone. Hmm, this isn't any better than the first approach...

But wait, there's another twist in this that must be followed for it to work. Since the penalty period only starts running if you are otherwise eligible for Medicaid except for the gift penalty, you must make the $50,000 you kept "disappear" somehow. No, hiding it and lying to the government is not what I had in mind. That will only get you a huge fine and some time in prison.

The trick is to take that $50,000 you kept and purchase a Medicaid annuity, as described in Part 1. Then you should immediately apply for Medicaid. You won't qualify, because of the gift you just made, but since you are now broke, the penalty will start running. That means that you must somehow cover your own nursing home expenses for the next 10 months. That is where the annuity comes in. Hopefully you purchased one that will pay you enough each month to cover your monthly nursing home expenses just throughout the penalty period. Ideally, the annuity payments stop at the exact moment that your Medicaid eligibility starts. The result is your children have an extra $50,000 they would not have had, had you done nothing, and you stayed out of prison!

Opt for Professional Guidance

Now, folks, this sounds simple, but let me warn you. Do not try this on your own without competent legal advice! There are a number of details that I omitted for simplification, and the rules of each state vary on exactly how this approach can be implemented. Nonetheless, it can be a powerful technique to save your family many thousands of dollars in the right circumstances.