Using Annuities to Shelter Assets (Old Methods)
Annuities were a great vehicle one could use to remove money from the asset column. If an annuity were in a permanent irrevocable payment mode, then that annuity would be considered income instead of an asset. So if one were single and had $100,000 in assets, he or she could purchase an annuity and lock it into in an irrevocable payment mode and, if no other assets were owned, the $2,000 asset limit would then instantly be met ($2,000 is the Medicaid qualifying limit in most states for single applicants).

The annuity had to meet a couple of requirements in order to qualify:
1. The annuity had to be non-assignable, non-transferable and irrevocable. This prevented an applicant from simply transferring ownership to a family member after qualifying for Medicaid assistance.
2. Under OBRA 93, the payment schedule could not exceed the annuitant’s life expectancy using the latest Social Security mortality tables as published by the Health Care Financing Administration (HCFA). This was designed to prevent the applicant from purchasing an annuity at age 90 with a Life/20 Year Certain payout. (Actuarially, it would be nearly impossible for the applicant complete the payout period by living to be 110 years old.)

Once the applicant satisfied the asset qualification limits, the next step would be to keep the applicant’s income as low as possible. That could be accomplished in one of two ways. The first consisted of locking the annuity into a Period Certain payout mode which meets the qualifications above.

As such, the applicant has been able to transfer $50,000 of personal assets that could have been used to pay for his long-term care needs into an annuity. If the annuity payments fall below income limits, the applicant qualifies for full Medicaid assistance. If the annuity payments plus other income take the applicant over state income qualification limits, the applicant need only put together a Miller Trust that allows him to funnel annuity payments into the trust and use only the annuity payments for his long-term care needs. The rest would be provided for by Medicaid.

A second way to satisfy the income qualification is to lock the annuity into an interest only plus $10 payment mode with an end-of-annuity balloon payment (this assumes, of course, that any other income the applicant might have, such as social security or pension payments, did not push the applicant over the income requirement limits). The object is to retain the asset in a non-countable form and have it produce the lowest income possible.

The process would work like this. In this example we will use a female age 78 with $100,000 to shelter and a HFCA mortality table life expectancy of 10.24 years. She could purchase an annuity paying interest only plus $10 with 10 Year Period Certain with a balloon payment (balloon payment meaning that the final lump sum payment would be paid at the end of ten years). Because the annuity is in irrevocable payment mode and the principal cannot be touched, it would not be counted as an asset. However, the minimal annuity payment would count toward the income qualifying limits.

Even better for the applicant, should the applicant die before the 10 year payment period is completed, the family receives the remaining Period Certain payments and collects the balloon payment at the end of 10 years (which is usually almost the entire amount of the original annuity minus the small amount which has been paid out).

The gamble with both of these examples is that the person needing care will die after the payout periods expire. In the first example the family would be left with nothing and in the second the applicant would be forced to re-qualify for Medicaid because she would receive a lump sum payment which would fall back into the asset category at the end of ten years.

Enter the DRA of 2005
Now under the DRA, any annuity which has a deferred or balloon payment will be counted as an asset, regardless. Or if it has gone into an irrevocable payment mode, the annuity will be considered an asset transferred at less than fair market value and will be subject to the qualifying penalty period. Both of these essentially eliminate the use of these annuity methods for the purpose of Medicaid Planning.

Further, a Medicaid Applicant must name the state as remainder beneficiary on all annuities or second remainder beneficiary behind a spouse, a disabled child or minor child under 21. As remainder beneficiary, the state will be guaranteed to receive first payout of any remaining funds up to the amount the state spent providing care for the applicant. The family is then entitled to any funds which exceed that amount.