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.
Just as a refresher, under the Medicaid rules, the Institutionalized Spouse (IS) may only have a maximum of $1,600 in assets in his name. The Community Spouse (CS) may have a house, a car and up to half of a maximum of $130,380, called the Community Spouse Protected Amount (CSPA). While there are income requirements for the IS, the CS may have as much income as she receives with no limit.
Income versus assets
If the CS has assets in her name that exceed the CSPA, she is expected to spend down the assets to the $130,380 limit prior to applying for Medicaid benefits. For some couples, this spend down is not hard – some home improvements and prepaying two funerals and your spend down is done.
For other couples with significant assets, these traditional Medicaid spend down strategies are impractical – nobody needs to upgrade their car to a Lamborghini! In such cases, the purchase of a Medicaid compliant single premium immediate annuity (SPIA) may make sense.
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. The idea behind the SPIA strategy is that since the CS may have unlimited income, the SPIA converts the assets above the CSPA to an income stream for the CS.
This means that with a SPIA, the CS may protect assets – even a significant amount of assets – which exceed the CSPA and still have her spouse be eligible for Medicaid benefits.
How to make an annuity work for you?
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 CS’s life expectancy – (if the CS 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 the CS predeceases the IS during the term of the annuity, then the State of Connecticut will be reimbursed for all monies paid out on behalf of the IS so far, as well as continue to be paid out going forward until the IS passes away. At that time, if there is a remaining balance in the annuity, the balance will be paid out to the CS’s contingent beneficiaries – such as her 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. A SPIA is only purchased 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.