It's a precarious situation that many elderly people find themselves in: They need long-term nursing home or assisted living care, but they don't have enough money to pay for it. So they consider applying for Medicaid, the joint federal-state program that offers health coverage to eligible low-income seniors. But because they have a little too much money to qualify for Medicaid, they try a Medicaid "spend down," a financial strategy that essentially requires a person to become even more cash-poor. In other words, they get to have their health care paid for but are more broke than ever.
Medicaid spend downs aren't always as bad as they sound. If you're helping a parent get rid of their revenue, at least the money they're spending often goes to things they need, like a new wheelchair or hearing aid. But sometimes they are as bad as they sound. What if your father needs Medicaid to pay for a nursing home but your mother is fine? It's all well and good to spend money to make your father poorer -- he'll get his needs met at the nursing home. But if you drain your parents' bank accounts, your mother will have even less to get by on.
That's why some people opt for a Medicaid-compliant annuity.
What Is a Medicaid Annuity?
An annuity -- as you might know -- is a fixed sum of money paid every year indefinitely, generally for the rest of a person's life. When people buy annuities, they're often deferred, meaning the payout doesn't come for some time. But Medicaid-compliant annuities are immediate annuities, which are paid out right away, as the name suggests. With a Medicaid-compliant annuity, you give a lump sum of cash to a company in exchange for a guaranteed income stream that will help the spouse who isn't moving into a nursing home maintain his or her quality of life.
"Medicaid-compliant annuities are the greatest planning tools if you have a loved one in a nursing home and you are trying to get Medicaid benefits," says Patrick Simasko, a financial advisor and estate planning attorney at Simasko Law in Mount Clemens, Michigan. Still, he says, "they are very complicated, so you definitely need an expert to put a Medicaid plan together."
How Medicaid-Compliant Annuities Work
Let's say that your father goes into a nursing home with a monthly bill of $6,000. Your parents have $250,000 in the bank and other countable assets, such as mutual funds and certificates of deposit that could go toward the spend down to help your father become eligible for Medicaid. If your parents use $250,000 to pay the nursing home bills, that money will be gone in less than four years. Medicaid kicks in at that point, so your father's needs are taken care of, but your mother has been scraping by on her Social Security check and has nothing in the bank account. Meanwhile, she is in good health but not exactly living her best life in retirement.
If your mother invests $150,000 of that $250,000 in a Medicaid-compliant annuity, she still has $100,000 in the bank for reserve funds, which may be allowed for your father to qualify for Medicaid (as of 2019). Medicaid's Community Spouse Resource Allowance can be as high as $126,420 in most states, but it varies; in South Carolina, for example, the spouse can only keep assets up to $66,480. So along with your mother's $100,000 in the bank account and her Social Security check, she also gets a Medicaid-compliant annuity of guaranteed monthly income. It won't be an incredible amount of money -- about $1,500 a month in this example -- but it's guaranteed, on top of a monthly Social Security check and perhaps pension income. Your mother is theoretically taken care of every month and still has some money in the bank, while your father qualifies for Medicaid.
Setting Up a Medicaid Annuity
Depending on your comfort level with financial tools like annuities, you may opt to seek professional guidance, such as a financial advisor or elder care attorney.
"It's not a do-it-yourself proposition," says Thomas Currey, chair of the board of directors of the consumer education nonprofit Life Happens in Arlington, Virginia. "You should consult an elder care attorney to help you understand it and structure it properly, given the technical nature of what it entails."
"Taxes come into play. Life expectancies come into play. It's not just 'liquidate your accounts and buy the annuity,'" Simasko says.
Still, if you do it correctly, a Medicaid-compliant annuity can be a good solution for couples, when one needs a nursing home and the other doesn't, Currey says.
"It affords the healthy spouse some means to continue to live with dignity," he says. But the biggest negative is that not everyone's life fits into the hypothetical examples you can construct for a Medicaid-compliant annuity to make sense. You need a decent amount of money to buy a Medicaid-compliant annuity that will produce a decent payout, according to Currey. Generally, that's often around $200,000 to $300,000, he says.
"If you have more assets than that, you'd do much better in the (stock) market," he says.
Other Factors to Consider
Simasko stresses that if you're going to look into this option, you want a Medicaid-compliant annuity and not what an insurance salesman may call a "Medicaid-friendly" annuity.
"It's a sales technique to go get the family member to purchase the annuity in hopes that the money is magically protected, thereby allowing the salesman to generate huge commissions. Do not fall into this trap," he warns.
And, of course, if you don't have that much in the bank, it may not make sense to buy any sort of annuity. As noted, this can be a precarious situation.
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