Is it Too Late When you are Already in a Nursing Home--Annuities

September 6th, 2016

This edition of the Koldin Report E-Newsletter continues a series that answers the question, "Is it too late to protect any of your life savings when you are already in a Nursing Home?" This edition reviews the option of purchasing an annuity. All prior newsletters are saved on our website. You can read them by clicking here.

In the previous newsletter, we discussed that the institutionalized spouse could transfer his/her life savings to the community spouse (at-home spouse). However, even if the community spouse has all of the life savings in his/her name, he/she is still subject to the Medicaid spousal support rules.

Under the Medicaid Laws in New York State for 2016, the community spouse (healthy spouse) is normally entitled to retain $74,820 (he/she can sometimes retain up to $119,220) of the couple's life savings. The community spouse is also entitled to retain $2,980.50 of the couple's combined income. A single individual in a nursing home is entitled to retain $14,850 of his/her life savings and $50 per month of income.

If the couple's or single person's resources exceed $74,820 or $14,850, then the excess normally must be spent on the cost of care before Medicaid eligibility can be established.

Example 1: Husband enters a nursing home. He has $75,000 of investments in his own account. Wife is at home and has $50,000 of investments in her own name. Husband is allowed to keep $14,850. Wife is allowed to keep $74,820. Under the Medicaid law, Husband will be told that he can transfer $24,820 to his Wife to bring her up to the $74,850. Husband will then have $50,180 left in his name. Since Husband can keep $14,850, he will be told that he must spend $35,330 towards the cost of his care before he will be eligible for Medicaid.

Example 2: Using the same facts as Example 1, instead of spending the $35,330 towards the cost of his care, Husband transfers the $35,330 to his Wife. Now Wife has $74,820 + $35,330 = $110,150. There is no transfer penalty for transfers between spouses. Husband is still not eligible for Medicaid because Wife has more than $74,820. Wife will be told that she must spend the $35,330 towards Husband’s cost of care before he will be eligible for Medicaid.

Instead of spending the $35,330 towards the cost of Husband’s nursing home bill, Wife could consider some asset protection options. One option is for Wife to purchase an annuity with the $35,330.

By purchasing an annuity, you are converting your life savings into an income stream. Any monthly payments you receive from the annuity are considered income and will be subject to the Medicaid income contribution rules, but will not be subject to the resource depletion rules. The annuity contract must fully comply with Federal and State laws and regulations. For example, the annuity must be irrevocable, you can only receive fixed monthly payments and not lump sum withdrawals of principal, and the term of the annuity must self-amortize within your life expectancy. The annuity must designate the Medicaid Agency as the primary beneficiary of the annuity after your death to be reimbursed for its expenditures.

Example 3: Same facts as Example 2, but instead of spending the $35,330 towards Husband’s cost of care, Wife purchases an immediate annuity. Her life expectancy under the Medicaid Tables is 15 years. Therefore, the annuity has a monthly payout over 15 years after which the annuity will be depleted. For this example, assume the annuity has a payout of $200 per month. Wife’s current income from Social Security, pension, interest and dividends, is $1,000 per month and Husband’s current income from all sources is $1,500 per month. Under the Medicaid laws, the community spouse is allowed to keep $2,980.50 of the couple's combined income. In this example, Wife could keep the $200 annuity income along with her $1,000 and her husband’s $1,500 since the total would be $2,700 which is less than $2,980.50.

Example 3 shows how instead of losing $35,330 towards Husband’s cost of care, Wife could purchase an annuity to increase her monthly income by $200 over the next 15 years to allow her to live a better quality of life. The risk in Example 3 is if Wife dies before the annuity pays out in full at the end of 15 years, then the balance of the annuity payments would be paid to the Medicaid Agency to reimburse Medicaid for whatever it paid out on Husband’s cost of care.

Example 4: Same facts as Example 3, but now assume that Husband’s income is $2,000 per month instead of $1,500. Since Wife’s income is $1,000, she would be entitled to receive $1,980.50 of Husband’s income to bring her up to the spousal income allowance of $2,980.50. If Wife purchased an annuity and received a payout of $200 per month, she would lose $200 of her husband’s income that would have been contributed to her because the annuity would replace her need for his income. Husband’s $200 would instead be contributed towards his nursing home bill.

Since the annuity income simply replaces Husband’s income in Example 4, the question is whether the annuity still makes sense for Wife to purchase compared to other asset preservation options. One factor to consider would be the Husband’s and Wife’s anticipated life expectancies. If Husband’s illness is such that he would only be expected to live for a few years and Wife is in good health and likely to live for many more years, then the annuity might still make sense because Wife could continue to receive the annuity payout after the Husband dies.

There are advantages and disadvantages with the annuity option to protect some or all of your life savings which need to be carefully considered. The next newsletter in this series will continue to review how you may be able protect some or all of your assets even when you are already in a Nursing Home, by gifting and lending with a promissory note.

When the Koldin Law Center, P.C. handles a Medicaid case, we not only handle the entire application process, but we also review asset protection options with our clients including options for purchasing an annuity. We review with our clients who are already in a Nursing Home options to protect some or all of their assets beyond merely establishing Medicaid eligibility.

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