Annuities as Asset Protection for Couples: Smart Move if You Do it Right

Safe and moneyBy Lara Schneider-Bomzer

Purchasing annuities is a good way for married couples to protect assets, but doing it wrong could mean huge penalties. Here is what you need to know about annuities as it relates to Medicaid planning in Connecticut:

If your spouse is residing in a nursing home or is in need of home care, chances are you’ve read our blogs about the ways to protect your assets and qualify your spouse for Medicaid benefits. But not all strategies apply to all couples.

Income versus assets

For example, in many cases, traditional Medicaid planning strategies, such as spending down on a car and home improvements, are impractical for couples. In such cases, the purchase of a Medicaid compliant single premium immediate annuity (SPIA) may make sense. With a SPIA, your spouse may protect assets exceeding the maximum Community Spouse Protected Amount of $126,420.

A few years ago, Czepiga Daly Pope & Perri won a landmark case in the Federal Court of Appeals that dealt with non-qualified annuities. The Court resoundingly sided with the firm’s position that a carefully structured non-qualified immediate annuity was an income stream and not an asset.

How to make an annuity work for you?

Since the healthy spouse’s income is exempt, the conversion of assets to a single premium immediate annuity effectively protects the assets for the healthy spouse. The term “income” does not necessarily mean taxable—Medicaid defines spousal income as recurring monthly fixed payments, so the annuity payments may be a return of principal payments.

To comply with federal Medicaid law, the annuity must provide for the following:

(1) It must be irrevocable

(2) It must be non-assignable

(3) It must be actuarially sound — payments must be made over a term not to exceed the healthy spouse’s life expectancy – (if the healthy spouse is annuitizing an IRA, however, the annuity need not be actuarially sound);

(4) The State of Connecticut must be the primary beneficiary.  This means that if you predecease your spouse who is receiving Medicaid benefits and pass away during the term of the annuity, then the State of Connecticut will be reimbursed for all monies paid out on behalf of the spouse receiving benefits.  Any additional balance remaining in the annuity will be paid out to your contingent beneficiaries – such as your children.

Should you purchase a SPIA?

The recommendation to purchase a SPIA is dependent on your particular circumstances. The most important thing to remember is that purchasing a SPIA is not a suitable strategy in every case.  It is only put in place when a long term care crisis has unfolded.

What’s the old saying?  “Timing is everything.”  Well, timing is crucial when it comes to the purchasing of a SPIA so make sure you meet with a qualified elder law attorney to ensure that the job is done right.

Related Posts:

4 Medicaid Catastrophes You Can Avoid

How to Qualify for Medicaid by Planning Now

Don’t Let Your Parents’ Money Ru Out: Key Ways to Protect Seniors’ Assets

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