How does a Medicaid Annuity Work?

Can a medicaid annuity help me keep assets in my family and still pay for my nursing home and qualify for medicaid. Here's an example of how it could work.

-- By K. Gabriel Heiser, Attorney

Let's take another look at how you can use Medicaid annuities. Say you're single and in the 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," which is based on the average cost of a nursing home in your state, and is usually set annually. So if your gift is $100,000, and the divisor is $5,000, then there's a penalty period of $100,000/$5,000 = 20 months.

If you indeed gave away 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. Here's how this works: Instead of giving away 100% and winding up with nothing for your family members as explained above, you give them 50% now and keep the other 50%. 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!

So you'd have to spend that $50,000 on your care, till 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 you made within the last 5 years, as a general rule), forcing your kids once again to pay for you till the $50,000 you gave them is gone. Hmmm; not 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 but for the gift penalty, you must make the $50,000 you kept "disappear," somehow. No, hiding it and lying to the Medicaid workers is not what I had in mind. That will only get you a huge fine and some time in prison; the food in the nursing home will start to look good to you in comparison!

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's where the annuity comes in: hopefully you purchased one that will pay you enough each month to cover your monthly expenses just for the penalty period. Ideally, the annuity payments stop at the exact moment that your Medicaid eligibility starts. Result: your children have an extra $50,000 they would not have had, had you done nothing. (And you stayed out of prison!)

Now, folks, this sounds simple, but let me warn you: Don't 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 can be implemented. Nonetheless, it can be a powerful technique to save your family many thousands of dollars, in the right circumstances.

K. Gabriel Heiser is an attorney with over 25 years experience in elder law and estate planning. Heiser is the author of “How to Protect Your Family's Assets from Devastating Nursing Home Costs: Medicaid Secrets,” an annually updated practical guide for the layperson. For more information about this book, visit Medicaid Secrets. Here's more about medicaid annuities.

Here’s an article explaining the new medicaid rules.  Finally, visit What is a Medicaid Annuity?

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