The Use of Immediate Annuities in Medicaid Planning for Married Couples

By Chadwicke L. Groover, Upstate Elder Law, P.A.

Immediate annuities can be a useful tool to protect the spouse of a nursing home resident who applies for Medicaid. These types of annuities allow the nursing home resident to spend down assets and give the spouse a guaranteed income. But immediate annuities may not work in every state, so be sure to check with your attorney.

Medicaid is the primary source of payment for long-term care services in the United States. To qualify for Medicaid, a nursing home resident must become impoverished under Medicaid’s complicated asset rules. In South Carolina, the applicant (called the “institutional spouse”) can have only $2,000 in “countable” assets. Virtually everything is countable except for the home (with some limitations), a vehicle, pre-paid funeral arrangements, and personal belongings. The spouse of a nursing home resident (called the “community spouse”) is limited to $66,480 (in 2019) in “countable” assets. While a nursing home resident must pay his or her excess income to the nursing home, there is no limit on the amount of income a spouse can have.

An immediate annuity is a contract with an insurance company under which the annuitant pays the insurance company a sum of money in exchange for a stream of income. This income stream may be payable for life or for a specific number of years, or a combination of both — i.e., for life with a certain number of years of payment guaranteed. In the Medicaid planning context, most annuities are for a specific number of years.

The spouse of a nursing home resident may spend down his or her excess assets by using them to purchase an immediate annuity. But if Medicaid applicants or their spouses transfer assets within five years of applying for Medicaid, the applicants may be subject to a period of ineligibility, also called a transfer penalty. To avoid a transfer penalty, the annuity must meet the following criteria:

• The annuity must pay back the entire investment. When interest rates were higher, it was possible to purchase annuities for as short as two years, but now short annuities usually don’t pay back the full purchase price.
• The payment period must be shorter than the owner’s actuarial life expectancy. For instance, if the spouse’s life expectancy is only four years, the purchase of an annuity with a five-year payback period would be deemed a transfer of assets.
• The annuity must be irrevocable and nontransferrable, meaning that the owner may not have the option of cashing it out and selling it to a third party.
• The annuity has to name the state as the beneficiary if the annuitant dies before all the payments have been made.

Given this planning opportunity, many spouses of nursing home residents use immediate annuities to preserve their own financial security. But it’s not a slam-dunk for a number of reasons, including:

• Other planning options may be preferable, such as spending down assets in a way that preserves them, transferring assets to exempt beneficiaries or into trust for their benefit, seeking an increased resource allowance, purchasing non-countable assets, using spousal refusal, or bringing the nursing home spouse home and qualifying for community Medicaid.
• The purchase of an annuity might require the liquidation of IRAs owned by the nursing home spouse, causing a large tax liability.
• The non-nursing home spouse may be ill herself, meaning that she may need nursing home care soon, in which case the annuity payments would simply go to her nursing home.
• The savings may be small due to a high income or the short life expectancy of the nursing home spouse, and the process of liquidating assets and applying for Medicaid might not be worth the considerable trouble.

In short, the use of this powerful planning strategy depends on each couple’s particular circumstances and should be undertaken only after consultation with a qualified elder law attorney. In addition, those who do purchase immediate annuities need to shop around to make sure they are purchasing them from reliable companies paying the best return.  And remember, to avoid a transfer penalty, the immediate annuity must comply with the criteria described above.