Immediate annuities can be ideal planning tools for spouses of nursing home residents. For single individuals, they are usually less useful. An immediate annuity, in its simplest form, is a contract with an insurance company under which the consumer pays a certain amount of money to the company and the company sends the consumer a monthly check for the rest of his or her life. In New York, the purchase of an annuity is not considered to be a transfer for purposes of eligibility for Medicaid, but is instead the purchase of an investment. It transforms otherwise countable assets into a non-countable income stream. As long as the income is in the name of the community spouse, it’s not a problem. Keep in mind, however, the income of the community spouse is subject to review by Medicaid.
In order for the annuity purchase not to be considered a transfer, it must meet three basic requirements: (1) It must be irrevocable–you cannot have the right to take the funds out of the annuity except through the monthly payments. (2) You must receive back at least what you paid into the annuity during your actuarial life expectancy. For instance, if you have an actuarial life expectancy of 10 years, and you pay $60,000 for an annuity, you must receive annuity payments of at least $500 a month ($500 x 12 x 10 = $60,000). (3) If you purchase an annuity with a term certain (see below), it must be shorter than your actuarial life expectancy. (4) Under the DRA, the state must be named the remainder beneficiary up to the amount of Medicaid paid on the annuitant’s behalf.
Mrs. Jones, as the community spouse in New York, the most money she can keep for herself and still have Mr. Jones, who is in a nursing home, qualify for Medicaid (her maximum resource allowance) is $109,560 (in 2009). However, Mrs. Jones has $209,560 in countable assets. She can take the difference of $100,000 and purchase an annuity, making her husband in the nursing home immediately eligible for Medicaid. She would continue to receive the annuity check each month for the rest of her life.
In most instances, the purchase of an annuity should wait until the unhealthy spouse moves to a nursing home. In addition, if the annuity has a term certain — a guaranteed number of payments no matter the lifespan of the annuitant — the term must be shorter than the life expectancy of the healthy spouse. Further, if the community spouse does die with guaranteed payments remaining on the annuity, they must be payable to the state for reimbursement up to the amount of the Medicaid paid for either spouse.
Annuities are of less benefit for a single individual in a nursing home because he or she would have to pay the monthly income from the annuity to the nursing home.
In short, immediate annuities are a very powerful tool in the right circumstances. They must also be distinguished from deferred annuities, which have no Medicaid planning purpose. Be sure to consult with a qualified elder law attorney before pursuing the strategy described above as mistakes in planning are costly.