An annuity is a financial asset. It is a contract between the purchaser and the annuity company.

In exchange for the purchaser's money, the annuity company agrees to pay the money back to the purchaser, with interest, over a period of time, sometimes for the purchaser's life or the life of a named beneficiary.

Life insurance companies and annuity salespeople have begun aggressively marketing products they call Medicaid annuities or Medicaid-friendly annuities. Salespeople sometimes claim these annuities will shelter your assets from being used to pay for long-term care because they are not counted for Medicaid eligibility purposes.

The sales pitch might include frightening statistics about the likelihood and high cost of long term care but little information on alternative planning techniques. Disadvantages of annuities may be downplayed or not disclosed at all.

What does Medicaid have to do with it? The issue for Medicaid is whether or not the purchase of an annuity is a transfer of cash that creates a period of ineligibility for Medicaid.

One of the basic rules of Medicaid eligibility is that a transfer of assets for less than fair-market value made within the five-year period (there is a phase-in of this five-year period as it increases from the former three-year period) will invalidate the application.

The Deficit Reduction Act of 2005, or DRA, was signed into law by President Bush on Feb. 8. The Medicaid reform portions of the DRA significantly tighten the rules for Medicaid applicants seeking coverage for long-term care costs.

According to the Medical Assistance Advisory Committee's interpretation of the new statute, any transfer within the look-back period will be deemed to have occurred on the date the applicant otherwise would qualify for Medicaid. This means an application would be void if during the look-back period there were gifts to anyone of more than $500 per month. This changes the 1965 gifting rules, which established a penalty period.

Applications made now are still being processed under the old rules. The Medical Assistance Advisory Committee will publish its operations bulletins with more detailed information for applicants on Feb. 1.

Disclosure/restrictions

The new law requires the disclosure of any interest of an applicant or an applicant's spouse in an annuity. This is not new. Pennsylvania law has always required full disclosure of assets in the application for Medicaid.

Restrictions on the marketability of immediate annuities are made void by the new law so the payment stream can be sold by the owner and, thus, converted from income into a lump-sum cash resource available to pay for care. These rules will not apply to commercial annuities that meet certain safe-harbor provisions, including that the state be named as the residual beneficiary of any remaining funds.

Thus, the new law requires that the commonwealth be named as the remainder beneficiary of an annuity as a condition of receiving Medicaid. The commonwealth must be the beneficiary until benefits paid are recovered; then another beneficiary can receive the balance. (A spouse continuing to reside in the couple's home, the community spouse or a disabled child can be beneficiary ahead of the commonwealth.)

Further, the new legislation provides that the purchase of an annuity that fails to name the state as remainder beneficiary "for at least the total amount of medical assistance paid on behalf of the annuitant" is treated as a transfer and causes a period of ineligibility.

Specifically exempted from this requirement of naming the commonwealth as a beneficiary are annuities purchased with the proceeds of certain retirement accounts and annuities that:

1. Are irrevocable and non-assignable.



2. Are actuarially sound



3. Provide for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments made.

Things to watch out for

A group of lawyers in another state put together a list of items to be wary of when purchasing Medicaid annuities:

If the annuity you buy is an irrevocable, nonassignable, immediate Medicaid annuity or Medicaid-friendly annuity, you receive your agreed-upon monthly payment. You cannot access the principal for any reason.

For example, if you leave the nursing home and return home and need the principal to help pay for assisted living services, it will not be available to you.

Some annuities are revocable and offer the capability of being converted to an irrevocable Medicaid annuity. However, if you want to withdraw your funds from this type of annuity while it is revocable, you may incur large penalties and taxes.

For married couples, payments from annuities may interfere with special Medicaid rules protecting income for the at-home spouse, and purchasing an irrevocable Medicaid annuity before a nursing home admission might decrease the amount of assets a couple would otherwise get to keep to qualify for Medicaid.

Annuity salespeople receive high commissions from the sales of these products. A misinformed or overly ambitious salesperson may exaggerate the benefits of these products in order to make a sale.

In many situations, annuities may be more restrictive than helpful. Annuities sold on the pretense they can assist in obtaining Medicaid may prevent an individual from being able to afford living in a less restrictive setting, such as an independent living center, adult foster care home, or assisted living facility.

Pennsylvania Medicaid law may change to allow the state to refuse Medicaid assistance as a result of the annuity. The state may or may not "grandfather" existing annuity arrangements.

"Medicaid Annuities" are being sold to people who have no present expectation of needing long term care. There is little or no benefit to purchasing a Medicaid Annuity in advance of needing long term care.

Financial planners and insurance salespersons who encourage their clients to use annuities as a way of protecting their assets are sometimes discouraging clients from purchasing long-term care insurance by promoting the purchase of an annuity and claiming that the annuity will protect their assets. Long-term care insurance is often the best way to plan for paying for long-term care.

All cases need to be analyzed on their own merits to determine if the use of an annuity is appropriate and will achieve a client's goals. Annuity salespeople are not qualified to give advice regarding the Medicaid regulations and probably understand very little about other options that might be available for protecting assets.

People who want complete advice regarding Medicaid planning and asset protection should talk to a competent attorney.


Patti Spencer, Esq., can be reached at 320 Race Ave., Lancaster, PA 17603; 394-1131; or Patti@spencerlawfirm.com. Her recently published book, "Your Estate Matters," is available at Borders Book Shop and amazon.com. It can also be ordered by calling (888) 280-7715. blog comments powered by Disqus