Medicaid (MassHealth in Massachusetts) is the primary source of payment for long-term care services in the United States. To qualify, however, those needing long-term care must become impoverished under MassHealth's complicated and often-changing rules. To make matters even more complicated, the rules differ depending on whether the patient seeks care at home, in an assisted living facility or in a nursing home. The following discussion of the use of immediate annuities applies only to the nursing home setting. But in that setting, immediate annuities can be of great benefit in protecting spouses of nursing home residents and to a lesser extent can help preserve assets for the children of nursing home residents who are unmarried or widowed, which will be the subject of another blog post.
Following are the most significant rules governing eligibility for MassHealth coverage of nursing home care:
- The applicant is limited to $2,000 in "countable" assets. Virtually everything is countable except for the home (with some limitations) and personal belongings.
- The spouse of the applicant is limited to $119,220 (in 2015) of countable assets. This limit only applies on application for benefits and disappears once the nursing home spouse has been approved for MassHealth.
- There is no limit on the nursing home resident's income, though with some exceptions most of it will have to be paid to the nursing home even after MassHealth coverage begins.
- There is no limit on the income of a spouse of a nursing home resident nor any obligation that she contribute it to the nursing home spouse's cost of care.
- Transfers of assets by the applicant for MassHealth or his spouse can cause up to five years of ineligibility for benefits.
Before going any further, at this point I generally advise my clients to ignore logic when considering taking MassHealth planning steps. With that said, in the case of married couples the use of immediate annuities essentially involves transforming excess assets, on which there are strict limits, into income on which there are no limits.We need to understand the nature of an immediate annuity. (At the end, I will distinguish immediate from deferred annuities.)
An immediate annuity is a contract with an insurance company under which the annuitant pays the insurance company a sum of money in exchange for a stream of income. The stream of income may be payable for life or for a specific number of years, or a combination of both, i.e. for life with a certain number of years of payment guaranteed. In the MassHealth planning context, most annuities are for a specific number of years.
In short, the spouse of a nursing home resident may spend down her excess assets by using them to purchase an immediate annuity that meets certain criteria, which we will discuss below. For instance, if John moves to a nursing home and John and Jane have $320,000 in countable assets (savings, investments and retirement accounts), Jane can take $200,000 in excess assets and purchase an immediate annuity for who own benefit. Upon reducing their countable assets to $120,000, John will be eligible for MassHealth.
If the annuity pays her $3,500 a month for five years, by the end of that time Jane will have received back her investment plus $10,000 of income. (Especially in this low-interest rate environment, annuities don't pay very much, but they can save a lot of money by qualifying for MassHealth coverage of nursing home care.) If she accumulates these funds, at the end of five years she will be right back where she started before John needed nursing home care.
For this to work, the annuity must meet a number of requirements, including:
- The annuity must pay back the entire investment. When interest rates were higher, it was possible to purchase annuities for as short as two years, but now such annuities don't pay back the full purchase price. This is because the insurance companies need to make a profit and pay the broker a commission with low interest rates and it takes more time to generate both.
- The payment period must be shorter than the owner's actuarial life expectancy. For instance, if in our example above Jane's life expectancy was only four years, the purchase of an annuity with a five-year payback period would be deemed a transfer of assets causing John to be ineligible for benefits for a period of time.
- The annuity must be irrevocable and nontransferrable, meaning that the owner may not have the option of cashing it out and selling it to a third party.
- The annuity may or may not have to name the state as the beneficiary if the annuitant dies before all the payments have been made. This is a gray area because federal law seems to require such a provision up to the amount of benefits paid on the nursing home spouse's behalf, but to date this has not been applied in Massachusetts. That said, there have recently been reports that some MassHealth staff members have begun imposing such a requirement. To clarify what this means, in our example Jane would most likely want to name her children to receive the annuity payments were she to pass away before five years had expired. MassHealth may begin requiring that it get the payments first up to the amount of funds it had spent for John's care, and that they go to John and Jane's children only after the Commonwealth has been entirely reimbursed.
Given this planning opportunity, many spouses of nursing home residents use immediate annuities to preserve their own financial security. But it's not a slam dunk for a number of reasons, including:
- Other planning options may be preferable, such as spending down assets in a way that preserves them, transferring assets to exempt beneficiaries or into trust for their benefit, seeking an increased resource allowance, purchasing non-countable assets, spousal refusal, or bringing the nursing home spouse home and qualifiying for community MassHealth.
- The purchase of an annuity might require the liquidation of IRAs owned by the nursing home spouse, causing a large tax liability.
- The non-nursing home spouse may be ill herself, meaning that she may need nursing home care soon, in which case the annuity payments would simply go to her nursing home.
- The savings may be small due to a high income or the short life expectancy of the nursing home spouse, and the process of liquidating assets and applying for MassHealth deemed not worth the considerable trouble.
In short, the use of this powerful planning strategy depends on each couple's particular circumstances and should be undertaken only after consultation with a qualified elder law attorney. In addition, those who do purchase immediate annuities need to shop around to make sure they are purchasing them from reliable companies paying the best return. In one case, we were able to save a spouse $100,000 in cumulative annuity payments since her broker had sold her an annuity paying a lousy return. (Annuity regulations permit buyers to back out for a short time after the purchase.)
A final caveat and explanation of deferred annuities: There is no benefit to purchasing an annuity in advance of its need. Some brokers will attempt to sell deferred annuities for MassHealth planning purposes. A deferred annuity is a completely separate beast. It permits a tax-deferred investment, which may make sense for investment purposes, especially since some offer favorable income streams. Deferred annuities can be "annuitized," meaning they can be turned into immediate annuities. But they can be a problem for MassHealth purposes if owned by the nursing home resident since the income stream would be payable to the nursing home instead of to the healthy spouse. Often for about seven years after the purchase of a deferred annuity, the annuity will charge a penalty for early withdrawal if necessary to transfer to the healthy spouse. In short, while immediate annuities can be great tools for MassHealth planning, deferred annuities should be avoided by anyone contemplating the need for care in the near future.