Many individuals falsely believe that their potential future long-term care and medical costs will be covered by Medicare, which is available to individuals once they reach age 65. While Medicare is widely considered to be quality, cost-efficient health coverage (in large part due to its cost-sharing component with taxpayers) and does cover a robust variety and amount of medical expenses, it does not cover all medical expenses.
One notable medical expense for which Medicare provides only (very) limited coverage is
In order to qualify for Medicare, an individual must have a qualifying hospital stay, which requires being formally admitted to a hospital for three or more consecutive days. If they do not meet this requirement, Medicare will generally not cover the cost of Institutional care ( a nursing home, rehabilitation center, etc.). But even in situations where an individual does have a qualifying hospital stay, Medicare will only help cover institutional care costs for up to 100 days.
To the extent that an individual requires continuing care in an institutional setting after a qualifying hospital stay, the first 20 days of that care are essentially on the house — or, at least on the taxpayer as Medicare will pick up the full cost. For the next 80 days, patients are responsible for daily coinsurance ($185.50 per day for 2021), with Medicare picking up the balance. But after that, Medicare is done and the patient is responsible for picking up the entire tab personally unless long-term care or similar insurance is covering the expense. However, in situations where the patient has limited resources (income and assets), Medicaid will generally foot the bill.
Created in 1965, at the same time as Medicare, by the
As noted above, Medicaid is generally only available to those with limited resources. Accordingly, in order to qualify for Medicaid, individuals must meet certain means-tested eligibility requirements that require them to have both income and assets below certain thresholds.
Notably, while there is an extensive array of federal laws, regulations and other forms of federal guidance that dictate how Medicaid must be administered, states have significant flexibility to operate Medicaid within their state in accordance with those guidelines. As a result, there exists a patchwork of available benefits, and eligibility requirements to receive those benefits, between different states —and sometimes between locations within a state as well.
Nevertheless, and despite the need for individuals to verify
Institutional Medicaid eligibility rules for single individuals
For 2021, a significant majority of states have a maximum countable asset limit of $2,000 for single individuals applying for Institutional Medicaid. A handful of states, meanwhile, have modestly higher maximum countable asset limits of between $5,000 and $10,000.
Assets, though, are only half of the equation. In order to qualify for Medicaid, an individual must also meet income eligibility requirements. More specifically, Medicaid enrollees must have either limited income or, in some states, medical expenses that eat up most of their (higher) income.
In 2021, to qualify for Institutional Medicaid under the regular rules in most states, an individual must have a monthly income of $2,382 or less. Some states, on the other hand, have income limits closer to $1,000. In the end, though, for individuals who will be receiving Institutional care, it's largely a matter of semantics because these income limits are not the amount of monthly income an individual can keep, but rather, simply the income levels at which point they can become eligible for Medicaid. If enrolled in Medicaid, the vast majority of that income (save for a maximum of about $150 per month — and in some states, less than one quarter of that) must be used to pay for care.
In more than 30 states, individuals with higher income can also qualify for Medicaid through what are known as "Medically needy income limits." In short, these limits look at an individual's total income and their total medical bills. If, after subtracting an individual's total medical bills, their net income is less than their specified threshold (which range from about $100 to about $1,100 per month, depending on their state of residence or, in limited cases, their specific location within a state), they will be eligible for Medicaid, regardless of how high their initial income (before medical expenses) was.
Any way you slice it, the point is that in order to qualify for Medicare, an individual must have extremely limited assets, and they must be using most of their income for medical expenses.
Eligibility for married couples with one spouse requiring institutional care
When it comes to married couples, the possibility of one spouse needing extended Institutional care can present additional challenges, such as when the cost of an ill spouse's care significantly impacts a healthy spouse's standard of living.
In an effort to prevent an ill spouse's healthcare costs from completely impoverishing their healthy spouse, the Medicaid rules were amended in the late 1980s to create "spousal impoverishment standards." These standards allow a healthy spouse to maintain certain assets, and potentially certain income of the ill spouse, that might have otherwise been required to be spent on the institutionalized spouse's care.
Community spouse resource allowance
For many couples, the most critical spousal impoverishment standard is the Community Spouse Resource Allowance (CSRA), which specifies the amount of the couple's assets that the community spouse (the healthy spouse) is able to keep while still allowing the ill spouse to qualify for Medicaid benefits. This standard is particularly important because when Medicaid reviews a married individual's application, they will generally consider the combined countable assets of the couple to determine whether the ill spouse is eligible for Medicaid. In other words, regardless of which spouse actuallyowns an asset, it is considered available for either spouse's care (assuming it's a countable asset).
In 2021, the minimum Community Spouse Resource Allowance that is permissible under federal law is $26,076, while the maximum Community Spouse Resource Allowance, adopted by a majority of states, is $130,380. Countable assets over the Community Spouse Resource Allowance are generally considered available for use for the ill spouse's care.
Example 1: George and Georgina are married taxpayers. George is ill and is in need of nursing home care. He has $70,000 in a bank account in his name only, while Georgina has $50,000 in a bank account in her name only. They also have a joint brokerage account with $150,000. Accordingly, their combined countable assets total $270,000.
The couple lives in a state that has a Community Spouse Resource Allowance of $130,380 and allows George to retain $2,000 of countable assets.
If George applies for enrollment in Medicaid, in addition to the $2,000 of countable assets that he is allowed to retain, Georgina will be able to keep $130,380 of their combined countable assets as a Community Spouse Resource Allowance.
The remaining $270,000 (total countable assets) — $2,000 (George's allowed countable assets) – $130,380 (Georgina's Community Spouse Resource Allowance) = $137,620 of the couple's countable assets will need to be used before Medicaid will begin to cover George's nursing home costs.
When it comes to applications for Institutional Medicaid, one important difference between assets and income is that while the combined assets of a couple are generally used to determine Medicaid eligibility, only the incomeof the ill spouse is considered for the same purpose. The healthy spouse's own income, meanwhile, is ignored.
Specifically, per
If payment of income is made solely in the name of the institutionalized spouse or the community spouse, the income shall be considered available only to that respective spouse.
This rule, commonly referred to as the "name on the check rule," means that any income paid to the healthy spouse is not considered for the purposes of an ill spouse's Medicaid application and generally does not have to be used to pay for the ill spouse's institutional care.
Example 2: George and Georgina from the previous example are applying for Institutional Medicaid for George. In addition to their assets, George receives monthly Social Security benefits of $2,000, while Georgina, who is still working, has a monthly income of $6,000.
If an Institutional Medicaid application is submitted for George, only George's monthly income of $2,000 will be considered as part of the Medicaid application. Georgina's $6,000 monthly income, on the other hand, will be excluded.
Minimum monthly maintenance needs allowance
In scenarios where the healthy spouse's own income is below a certain threshold, a separate spousal impoverishment standard, known as the Minimum Monthly Maintenance Needs Allowance (MMMNA), can allow the ill spouse to transfer a portion of their income to the healthy spouse.
As of July 1, the Minimum Monthly Maintenance Needs Allowance that can be established by a state is $2,177.50 for all states except Alaska and Hawaii. The Maximum Monthly Maintenance Needs Allowance that can be authorized by a state is $3,269.50. To the extent that a healthy spouse's own income is below the Minimum Monthly Maintenance Needs Allowance established by their state, they can retain the income of the ill spouse until the combined income reaches that minimum amount.
Medicaid look-back and penalty periods
If an individual believes that they are likely to require Institutional Medicaid in the future, one planning strategy to preserve their assets is simply to give their countable assets away to others (such as children), who will hopefully use those assets later for the ill spouse's benefit. This way, when they submit their application to Medicaid, their countable assets will be below the required asset limit for eligibility, giving them access to Medicaid, all while preserving assets for themselves, via transferees using those assets for their benefit, as well as for future generations. Such transfers cannot be made to a spouse since, as discussed above, Institutional Medicaid eligibility takes into consideration the combined countable assets of a couple.
But transfers (gifts) to persons other than a spouse are not a foolproof planning strategy either, thanks in large part to the Medicaid look-back period. In short, the Medicaid look-back Period is a five-year period (30 months; 2 ½ years, in California only) before an individual applies for Medicaid, during which if an individual transfers countable assets, or otherwise disposes of them for less than fair market value, they will be subject to a penalty period.
This penalty period is the length of time during which an individual will not be eligible for Medicaid due to transfers of countable assets during the look-back period. The actual length of the penalty period varies and is calculated by dividing the value of countable assets that were transferred during the look-back period by the average local cost of privately paid nursing home care.
Example 3: Violet and Mike are a married couple living in Georgia. An unfortunate accident has recently left Mike in need of ongoing institutional care. In a panicked attempt to protect their assets, the couple transferred all of their countable assets, totaling $400,000, to their daughter shortly before applying for Medicaid.
The current cost of private-paid nursing home care in Georgia is $8,517 per month. Accordingly, even though Violet and Mike currently have no countable assets, Medicaid will not pay for Mike's Institutional care for $400,000 ÷ $8,517 = 46.96 months — nearly four years!
Given the Medicaid look-back and penalty periods, one obvious Medicaid planning strategy would be to give away your assets five or more years before you need care. Indeed, though that is an effective strategy in theory, in reality it is not as effective as one might think.
In many circumstances, the health event that precipitates the need for Institutional care, such as a fall or accident, is unforeseen — or at least does not leave five or more years between the health event and the need for extended skilled care.
And even when such an event is reasonably foreseeable, individuals may not feel comfortable transferring assets out of their name for fear of losing control. In still other situations, individuals simply choose to ignore the reality of the potential need for institutional care because, frankly, it's not much fun to think about oneself in that (lack of) capacity.
Due to these reasons, along with others, individuals often only engage in Medicaid crisis planning when the need for institutional care is imminent. And, unfortunately, by that time the look-back period severely limits the ability of the affected individual or couple to transfer countable assets to others.
Medicaid annuities as crisis-planning tools
Simply put, crisis Medicaid planning is the attempt to retain as many assets and as much income as possible in the face of a likely near-term or immediate need for institutional care. There aren't a ton of planning options, and frankly many of the options that are available aren't really what one might consider good, just less bad than the alternative of having those resources consumed by the cost of institutional care.
One option that can be explored in Medicaid crisis-planning scenarios is the Medicaid Compliant Annuity, also known as a Medicaid annuity. This tool is often particularly valuable for married couples who have countable assets that exceed the amount of assets they'll be able to retain under state law while still qualifying the ill spouse for Institutional Medicaid.
At a high level, a Medicaid annuity is a tool that can allow a married couple to convert countable assets of the couple into the “ignored” income of a healthy spouse. More specifically, when a married couple's assets exceed the amount of countable assets they will be allowed to keep, they can “spend” the excess assets by purchasing an annuity that pays income only to the healthy spouse. And since the healthy spouse's income doesn't prevent the institutional spouse from being eligible for Medicaid (thanks to the name on the check rule discussed earlier), the Medicaid annuity can be an effective way to help preserve the assets and maintain the healthy spouse's future standard of living.
Example 4: Recall married taxpayers George and Georgina from Examples 1 and 2, who had $270,000 of countable assets, exceeding the total amount of countable assets that they could retain for Medicaid to cover the cost of George's care by a total of $270,000 (total Countable Assets) – $2,000 (George's allowance) – $130,380 Georgina's Community Spouse Resource Allowance) = $137,620.
If the couple has done no planning, they will have to spend down their own assets to pay for George's care until their assets drop below the combined $132,380 they are allowed to retain.
By contrast, the $137,620 of countable assets over the combined asset limit for the couple could be used to purchase a Medicaid Compliant Annuity payable to Georgina only. That Medicaid Compliant Annuity could then pay Georgina an income stream for the rest of her life expectancy (more on this in a bit).
The purchase of the annuity, even though it was made using the assets in excess of a couple's combined allowance, is not considered a prohibited transfer during the look-back period. Instead, it will be treated as though the couple simply spent the money. Furthermore, since the annuity payments will be made payable only to the healthy spouse (Georgina, in the example above), the healthy spouse will be able to keep those funds, thanks to the name on the check rule.
Timing of the Medicaid annuity purchase
Although individuals and planners should always check to verify local Medicaid rules, the steps involved in purchasing a Medicaid annuity tend to be fairly similar. Notably, the annuity should generally be purchased only after institutionalization.
Accordingly, the first step in the process (once all assets and incomes have been reviewed, and it's been determined that a Medicaid annuity is an appropriate planning strategy) is actually Institutionalization itself. The reason for this is that the date of institutionalization (the day the ill spouse enters a hospital and/or nursing home for a period of at least 30 days) is the day that will be used to create a snapshot of their assets. Once this snapshot is taken, the amount of assets that the couple can keep can then be calculated, and the excess used to purchase the Medicaid annuity.
Then, with assets reduced to levels sufficient to qualify for Medicaid, the couple can apply for Medicaid with a level of income/assets eligible for approval. It is worth noting that while the Medicaid annuity's income that will be paid to the healthy spouse will not prevent the ill spouse from qualifying for Medicaid, it does need to be disclosed on the Medicaid application.
Requirements for Medicaid Compliant Annuities
One important planning consideration for those thinking about using annuities as a way to preserve a couple's excess resources is that not all annuities can be used for this purpose. Rather, an annuity must meet several requirements to avoid being considered a transfer for less than fair value and resulting in a Medicaid penalty period.
Naming the state as remainder beneficiary
First, under
An exception to this general rule exists when in the less common situations where there is a minor child or a disabled child. In such instances, that minor and/or disabled child can be named as the primary beneficiary, provided the state is named as the contingent beneficiary. If, however, the representative of such a minor and/or disabled child disposes of the annuity for less than fair market value, the state must be elevated to the primary beneficiary (which would put the state in line as a beneficiary ahead of that minor/disabled child).
Annuities must be irrevocable, nonassignable, immediate and actuarially sound
In addition to the beneficiary requirement above,
- Irrevocable
- Nonassignable
- One that provides equal payments during the term of the annuity with no deferral (it must be an immediate annuity) of payments or balloon payments
- Actuarially sound
The first three requirements above are relatively straightforward. But what does it mean to be "actuarially sound"?
From a Medicaid planning/Medicaid annuity perspective, the term "actuarially sound" means that the payments from the annuity cannot extend longer than the actuarial life expectancy (generally, as estimated by the Social Security Administration, although some states use a state-specific table) of the healthy spouse, and that the payments from the annuity during that time must be equal to or greater than the initial investment in the contract.
Example 5: George and Georgina together have $270,000 of countable assets, with $137,620 over the combined asset limit allowed in their state. When we last checked in on the couple, they were in the process of using the $137,620 to purchase a Medicaid Compliant Annuity.
Suppose that Georgina's actuarial life expectancy, as determined by the SSA, is 8.33 years (100 months). In order for the couple's annuity to be considered a Medicaid Compliant Annuity, the payments from the annuity must be made over a period of 100 months or less.
If a 100-month term is selected, monthly payments from the annuity must be no less than $137,620 (the initial investment in the contract) ÷ 100 = $1,376.20, which would theoretically result in the entire amount invested being paid out before the end of Georgina's life expectancy.
In the example above, the 100-month term is one option for the couple, but a shorter selected term that produces larger payments may be a better option.
Selecting the best term for a Medicaid annuity
As discussed above, Medicaid Annuities must have guaranteed payment periods equal to or less than the healthy community spouse's life expectancy, and the initial investment must be returned during that time as well. That, effectively, places a maximum on the length of the term of the annuity, but it does not set a minimum term length. Indeed, for married couples looking to use Medicaid annuities as tools to help preserve resources for the healthy spouse and future heirs, a shorter guarantee period is often preferable.
Recall that in order for the purchase of an annuity not to be deemed a transfer for less than fair value, the state must generally be named as the primary beneficiary of the annuity. Naturally, the longer the term of the annuity (up to life expectancy of the healthy spouse), the lower ongoing payments will be, and the longer it will take the healthy spouse to recoup their investment. And if they die prior to doing so (or at any point prior to the end of the term of the annuity), the remaining payments will generally be lost to the state to repay the cost of the Institutionalized spouse's care.
A fairly simple way of reducing the chance that the healthy spouse fails to recoup their investment before their death is to shorten the term of the annuity. By doing so, the healthy spouse will have their assets returned more quickly (in the form of larger income payments), reducing the chance that resources are lost to the state.
Example 6: In Example 5, we saw that due to Georgina's life expectancy of 100 months, the term of her annuity would have to be 100 months or less. Further, we determined that if payments were to be made over Georgina's 100-month life expectancy (the annuity term selected), then monthly payments would have to equal no less than $137,620 ÷ 100 = $1,376.20 (in reality, they would probably be slightly higher, as the insurance company would apply some level of interest to the payments).
Suppose, now, that George and Georgina have a healthy adult child for whom they would like to try and preserve assets. If this is a significant concern, even though Georgina may appreciate the appeal of ongoing income over her life expectancy, she may wish to instead opt for a shorter annuity term to increase the chances that she outlives the term of her annuity and gets as much as possible.
For instance, if Georgina opted for a five-year annuity term (60 months), then by the end of that five-year term, Georgina will have received back (via larger monthly payments) at least her initial investment in the contract (or else it wouldn't be a Medicaid Annuity!)
Accordingly, if she were to die after six years (72 months), none of her income — which is essentially just a delayed return of her previous assets — would be lost to the state in the form of Medicaid recapture for George's care.
By contrast, had she stuck with the original 100-month term she had originally contemplated, at least 100 (original life expectancy) – 72 (actual life expectancy) = 28 payments of $1,376.20, or more than $38,500, would have been lost to Medicaid.
As the example above illustrates, with the right structure, Medicaid annuities can help certain couples dramatically reduce the amount of assets that are required to be spent on Institutional care.
Downsides of Medicaid annuities
That said, they are far from a perfect planning solution.
Clearly, one of the biggest downsides to using a Medicaid annuity as part of Medicaid planning for couples is that the healthy spouse may die “too soon,” that is before the term of the annuity has been completed, and assets (income at that point) may end up getting lost to Medicaid anyway.
But there may be a number of other complications and reasons to avoid using a Medicaid annuity for planning as well.
Not all states play nicely with Medicaid annuities
Despite the fact that the federal government has provided guidance with respect to Medicaid annuities, and there appear to be clear requirements for them provided by the
In some of these (minority of) states, the annuity may be treated as an asset that must be spent down, while in others, the annuity may be considered an impermissible transfer, resulting in a Medicaid Penalty Period. Accordingly, individuals must always be cognizant of state rules.
Medicaid annuities are irrevocable, but laws can be changed
In its award-winning advertising campaign,
The same, however, is not true of Medicaid law. While the income of a healthy spouse can generally be retained today, perhaps a future Congress will decide that such income should be used to a greater extent to provide for the care of an ill spouse. Maybe a state will change its interpretation of the rules to join the ranks of those who don't allow such annuities.
The bottom line is that while the rules of the game may change in the future, once the Medicaid annuity is purchased, it is effectively the hand that must be played.
Better options may be available
Ultimately, the most compelling reason to avoid the use of a Medicaid annuity for most people is simply that a better Medicaid planning option may exist. For instance, a healthy spouse may be able to petition their state (or a court) to try and retain more than the Community Spouse Resource Allowance. In a small number of states, a healthy spouse can use a spousal refusal to deny the ill spouse the use of the healthy spouse's assets, at which point, Medicaid will mercifully pick up the cost of care.
Ultimately, the key point is that, in a perfect world, individuals in need of Institutionalized care at some point in the future would transfer assets to others at least five years prior to requiring such care. However, that's just not the world we live in. And either because individuals don't foresee a future need for Institutionalization, or they're just not yet willing to transfer assets until it's a last-minute near-certainty, Medicaid crisis planning is not uncommon.
In such situations, when institutional care is imminent, Medicaid annuities can be a useful tool, particularly for married couples, to help preserve wealth for a healthy spouse and to protect assets for future heirs.
