Annuities and Medicaid

San Antonio Express-News May 23, 2006 Annuities and Medicaid copyright 2006, Paul Premack
Dear Mr. Premack: I was invited to a luncheon to hear about investment choices for Seniors, and the lecturer (perhaps I should call him "salesman") spent a great deal of time trying to convince us to purchase annuities. What caught my attention was his claim that annuities can be used to qualify for Medicaid. My husband may need a nursing home soon, and we only have enough to pay for a few years ourselves. He said a lot of convincing things, but I am a skeptic and wanted to check with you first. Thanks – NS Annuities are an insurance product that can be used for long-term investment purposes or to create a monthly cash flow for the purchaser. A "deferred annuity" gets special tax treatment; there is no income tax on the interest accruing in the annuity until it is paid out. Pay out occurs either when the term of the annuity runs out, when funds are withdrawn as may be allowed by the annuity contract, or when the annuitant dies. An "immediate annuity" provides regular payments to the annuitant, consisting in part of return of the invested funds and in part of interest earned. Payments might be for a certain number of years or for the annuitant’s entire lifetime. When considered simply for investment purposes, deferred annuities are more popular with Seniors than immediate annuities. Even without Medicaid considerations, annuities have drawbacks the salesman may not have emphasized. For instance: Deferred annuities have a penalty provision for early withdrawal of funds (though minimal withdrawals may be penalty free). It is common to lose up to ten percent of your invested principal if you need to take all the funds out before the annuity matures. Annuities have sales commissions that may be higher than other investments. The commissions are what motivated the lecturer to invite you to a free lunch and are what pay for your lunch if you decide to invest. From the perspective of qualifying for Medicaid, annuities have a checkered past. To qualify for Medicaid, a person must be both low income and have a low amount of resources. Many years ago, investing in an annuity was a way to legally hide money from the government so the funds were not counted as a resource. The rules were changed in 1993, and were further restricted in February 2006. Under current law, a deferred annuity is a countable resource. It is treated by Medicaid just like a bank account and cannot legally shelter assets. On the other hand, an immediate annuity can, under limited circumstances, still be used for Medicaid. However, those circumstances are so very limited that using an immediate annuity usually provides no benefit. Specifically: Each payment counts as income. If the Medicaid applicant’s income exceeds $1809 per month, the patient may be disqualified from Medicaid. If the annuity payments are made to the applicant’s spouse, the payments when cumulated with all the other income the couple has, cannot be retained when the income exceeds $2,488.50 per month. The invested principal legally counts as a resource unless the annuity is 1) irrevocable, 2) paid out in equal monthly installments, 3) paid out entirely within the applicant’s life expectancy, and 4) repays the state for its Medicaid expenditures except for payments made to the applicant’s spouse. The new federal law debatably eliminates that exception, but there are varying and as yet unsettled interpretations of the new law.
Prior Week: Passing Title to Mineral Interests Next Week: Anatomical Gift Declaration
Disclaimer: This column answers a specific legal question asked by an individual in Texas. The answer may or may not match your individual situation. Be careful not to treat this column as specific legal advice, as it may not meet your individual needs. It may give you a solid basis for discussion with your own attorney. You should consult with your personal attorney before you take any action on this or any legal issue. Also, please be aware that laws change, so this column is valid only as of the date it was published. This communication does not create an attorney-client relationship between the author and the reader.