Sam and Mollie are in a crisis. Their cash is running low. Sam broke his hip and after repeated surgeries and setbacks, he can no longer live independently. The discharge nurse at the hospital meets with the family to explain the choices. Sam’s needs are not the only ones to consider. Mollie needs funds to remain living independently in their apartment. The couple has social security income and a small pension and an investment account of about $100,000 owned by Mollie.
While Sam remains alert and intellectually active, the couple cannot afford to pay for around the clock care that would be needed for Sam to return home. The best choice from an economic point of view is for this couple is to have Sam move to a Medicaid bed at a local nursing home. This option will provide the care that Sam needs and allow Mollie to remain at home. However, the couple is not currently eligible for Medicaid. The $100,000 investment account will be deemed owned by both parties for Medicaid application purposes. One choice would be for Mollie to spend down the $100,000 on acceptable expenditures like the purchase of a car, pay off debt and to buy a prepaid funeral plan. However, the choice to spend down assets would leave Mollie with little funds for her own future needs.
The better choice might be the purchase of an annuity. There is only one kind of annuity that can be purchased by Mollie that will keep Sam eligible for Medicaid. Mollie must purchase a single premium immediate annuity that is irrevocable. The annuity names Maryland as the first beneficiary of any remaining benefit at her death (subject to limitations). The annuity must be payable over Mollie’s life expectancy. This is called a Medicaid Compliant Annuity. A single premium annuity is one created with a lump sum of cash, such as Mollie has. The annuity has to be irrevocable so that Mollie can’t later change her mind and borrow against the annuity or accelerate the payments. To the extent that Maryland has a Medicaid lien on Sam and Mollie’s estate, the remaining funds in the annuity at the death of Mollie and Sam will be payable to Maryland Medicaid. With the average monthly cost of care paid by Medicaid hovering at $6,800 per month in 2013, it is unlikely that there would be anything left after the payment of a Medicaid lien.
Sam and Mollie’s situation is typical, but two other asset types should also be considered, retirement accounts and houses. If the $100,000 were owned in a qualified retirement account, Mollie might have slightly better options with the annuity. If an annuity consists of qualified retirement assets, it need not be irrevocable, non-assignable, actuarially sound, or provide for equal payment. These distinctions are difficult to navigate, and there could be tax consequences so this choice should be addressed with caution. If Mollie and Sam owned a home, the value of the house might escape inclusion in the calculation of eligibility for Medicaid, so long as Mollie remains living in the home or intends to return to the home.
In the end, Mollie may have a reasonable monthly income from the annuity. The annuity income belongs to Mollie and does not have to be shared with Sam. The pension and social security due Sam will be applied toward the nursing home costs, cutting Mollie’s total available income. However, if her annuity and Social Security does not produce enough income to meet the allowable minimum monthly income, she will be able to tap into Sam’s Social Security. The monthly maintenance needs allowance for Mollie is a minimum of $1,891.25 and a maximum of $2,898. This will not be a comfortable arrangement for Mollie but is much more attractive than the alternative of a total spend down leaving her destitute.
Many insurance agents and investment advisors can provide annuities. Please be cautious. There are only a few that regularly provide the kind of annuity that qualifies for Medicaid. These agents will also offer the correct language for the beneficiary designation. If the designation doesn’t precisely name Maryland Medicaid as the first beneficiary to the extent of the lien, then the annuity will not qualify. In some cases, the insurance company offering the annuity may ask for a letter from an attorney approving the beneficiary language. This puts the attorney in a difficult position. Most attorneys charge for a legal opinion letter. After all, the annuity company is attempting to shift the burden of using the exactly correct language in the beneficiary designation from the annuity company to the attorney. Moreover, it is not certain that every applicant for a Medicaid compliant annuity will have an attorney advising them, or one who is willing to endorse a beneficiary designation without a fee.
Medicaid planning choices are far greater when long-term planning can be employed. Sadly, most elderly Americans attempt to avail themselves of Medicaid planning only when a crisis is upon them. In many of those cases there are still a few options, and an annuity may be particularly attractive.
Evan J. Krame
Rockville, MD © 2013