Medicaid Compliant Annuities
When applying for long-term care Medicaid, be that in a nursing home or for Home and Community Based Services (HCBS) in one’s home, or an assisted living facility via a Medicaid waiver, there are income and asset limits that must be met. For married couples, when just one spouse is applying for these types of benefits, there are spousal impoverishment rules in place to ensure that the non-applicant spouse (the “Community Spouse”) has sufficient financial means from which to live.
Relative to spousal impoverishment provisions, an applicant spouse is often called the “Institutionalized Spouse.” This can be confusing since the applicant spouse does not have to be institutionalized (reside in a nursing home). Rather, the applicant spouse can receive long-term care services in their home or community via a HCBS Medicaid Waiver.
The Minimum Monthly Maintenance Needs Allowance (MMNA) is one spousal impoverishment rule. It allows the Institutionalized Spouse to transfer a portion, or in some cases, all of their monthly income, to the Community Spouse. The MMNA is intended for Community Spouses who have little to no monthly income. In order to receive this spousal income allowance, the Community Spouse’s monthly income must fall under a specified level. Effective July 1, 2022, through June 30, 2023, Maryland’s minimum MMNA is $2,288.75 and maximum MMNA is $3,435.
The Community Spouse Resources Allowance (CSRA) is another spousal impoverishment provision. The CSRA protects a certain amount of the couple’s resources for the community spouse.
Not all of a couple’s assets/resources are counted when calculating the CSRA. There are Countable (non-exempt) assets, and Non-Countable (exempt) assets. Countable assets are generally considered liquid assets, like cash, stocks, and bonds. Exempt assets include the couple’s primary home, household furniture and appliances, clothing, a vehicle, irrevocable funeral and burial trusts, and life insurance policies with a total face value under a certain amount.
All countable assets of a couple, regardless of which spouse legally owns an asset, are determined on a “snapshot date.” The snapshot date is generally the applicant’s first day of institutionalization or the date they qualify for a Medicaid waiver. In Maryland, the Community Spouse can retain 100% of the couple’s countable assets up to the CSRA cap of $137,400.
If the Institutionalized Spouse’s portion of the couple’s assets is over the asset limit and/or the Community Spouse’s portion is over the maximum CSRA, the couple must “spend down” their countable assets to meet the asset limit.
There are three ways to spend-down countable assets. First, the individuals should pay off their mortgage, credit card debt, and any other bills. Second, they should purchase or improve exempt assets (primary home, one vehicle, household items, etc.). Third, the couple can purchase a Medicaid Compliant Annuity with the remainder of the required spend-down.
A Medicaid Compliant Annuity (MCA) is an annuity that has zero cash value, and is only considered income to the owner. MCAs have five requirements. They must be
actuarially sound – meaning the term of the annuity must be fixed and equal to or shorter than the owner’s Medicaid life expectancy;
equal payments – no deferral or balloon payments, for example; and
the state Medicaid agency is a beneficiary.
To this fifth point, if the Community Spouse is the MCA owner, the state Medicaid agency must be the primary beneficiary, unless the individual’s child is a minor or disabled, in which case the state can be the contingency beneficiary. However, if the Institutionalized Spouse is the MCA owner, the Community Spouse can be the primary beneficiary, and the state Medicaid agency is the contingent beneficiary. This is one of the main draws of purchasing an MCA in the Institutionalized Spouse’s name. In that case, upon the Institutionalized Spouse’s death, the Community Spouse can continue to receive the MCA payouts for the rest of the annuity term, or can elect to cash out the remaining amount.
To receive the benefit of this cash-out option, the Community Spouse would have to survive the Institutionalized Spouse. Therefore, this would not make sense if the Community Spouse has questionable longevity.
Purchasing an MCA for the Institutionalized Spouse makes sense if the couple’s monthly income is less than the MMNA. This will allow the couple to take advantage of the income shift from the Institutionalized Spouse to the Community Spouse. This shift means that the co-pay for the long-term care will be lower (because it depends on the Institutionalized Spouse’s income), and the Community Spouse’s income will be higher, so he or she can spend the additional income as they please. Again, this also allows the Community Spouse to receive a cash-out upon the death of the Institutionalized Spouse before the end of the annuity.
If the couple’s monthly income is greater than the MMNA, or the Community Spouse needs a higher income to support their lifestyle, purchasing an MCA in the Community Spouse’s name may make more sense. The goal with these MCAs is to structure the annuity to meet the Community Spouse’s needs.
These are complex estate planning mechanisms and determining if one is appropriate for you and your family will depend on your unique circumstances. If you are looking to take advantage of a Medicaid Compliant Annuity or other retirement account planning instruments, contact us today.