The average cost of nursing home care just topped $100,000 a year, a cost few can afford. But Medicaid applicants with too much money or assets are denied coverage for long-term care and they have to pay their own nursing home bills. For many people, paying for a nursing home for several months depletes their savings. While they can then qualify for Medicaid at that point, their spouses are sometimes left penniless.
Buying an immediate annuity can use up excess assets that are preventing Medicaid eligibility and replace them with a monthly check, payable to the Medicaid applicant's spouse (referred to as the "community spouse"—the spouse living in the community rather than in a nursing home). An annuity isn't a countable asset for Medicaid purposes.
Sound too good to be true? It's not, and when done properly, this technique can preserve a large portion of a couple's resources to provide for the community spouse, who may live for many years. The couple's children may benefit as well.
First, let's provide some background that's important in understanding how an annuity can be so valuable in Medicaid planning.
We discuss thoroughly how income and resources are treated differently for purposes of Medicaid eligibility in Nolo's article on when Medicaid pays for nursing homes. Here's a quick summary of the financial limits for Medicaid's long-term care coverage.
In most states, the maximum amount of "resources" (assets) that can be owned by the Medicaid applicant is $2,000. But not all assets count toward this amount, including a car and a home (with equity up to $713,000 in most states, or more in high-cost states).
Resources owned by both spouses are combined when making the eligibility determination, but the community spouse is allowed to keep a specific amount of resources. The amount the spouse is allowed to keep is called the "community spouse resource allowance" (CSRA) and it's different in every state.
Community spouse resource allowance. Most states use both a minimum CSRA and a maximum CSRA. In these states, the community spouse is able to keep half of the couple's combined resources, up to the maximum CSRA ($154,140). If half of the couple's resources doesn't reach the minimum CSRA (typically $30,828, but higher in a few high-cost states), the community spouse can retain all of the couple's assets, up to the minimum CSRA.
A handful of other states (including Florida) have a single CSRA maximum (typically $154,140, but lower in a couple of states). In these states, the community spouse can retain all of the couple's resources up to the single CRSA max in that state. In other words, the couple's assets aren't split in half when deciding Medicaid eligibility. But everything over the CSRA cap is attributed to the spouse needing Medicaid, and must be "spent down."
Spending down assets. When a Medicaid applicant is "over-resource"—which means they have too many assets to qualify for Medicaid—Medicaid requires that the applicant spend the money before they can qualify for Medicaid. This process is called spending down. Medicaid doesn't really care what that money is spent on, as long as nothing is given away for less than it is worth. The couple can pay any legitimate expense, such as medical bills, taxes, credit cards, housing expenses, vacation costs, and so on.
In most states, the income limit for an applicant for Medicaid-paid long-term care like nursing homes and home or community-based services (HCBS) is $2,829 per month. But Medicaid nursing home residents are only allowed to keep a small personal needs allowance. The nursing home collects the rest of the resident's income as the Medicaid recipient's "share of cost."
Medicaid counts income for eligibility purposes only if it's payable to the Medicaid applicant. The income of the community spouse is specifically excluded from the eligibility determination. This treatment of income follows what's referred to as the "name on the check" rule; the community spouse is allowed to keep all of the income payable to the community spouse.
In addition, if the community spouse has little income of their own, federal law allows that spouse to keep some income belonging to the spouse going into a nursing home. The community spouse can keep up to about $2,400 to $3,800 per month (in 2024), depending on the state (that amount is called the "minimum monthly needs allowance").
Purchasing an annuity means cash assets don't have to be spent down on other things. But while buying an annuity gets rid of cash assets, it wouldn't make much sense to purchase an income annuity that provides income to the nursing home resident, since most of that money would just go to nursing home expenses as their share of cost.
For Medicaid planning, purchasing an annuity converts an asset into a stream of monthly income for the community spouse. (As we just discussed, the community spouse's income isn't counted toward Medicaid eligibility.) When an asset is turned into community spouse income, the asset "disappears" and no longer interferes with Medicaid eligibility. So income annuities that are payable to the Medicaid recipient's spouse are protected from Medicaid.
To be acceptable to Medicaid, the annuity payments have to be calculated to be completely paid out before the end of the community spouse's life expectancy. This rule is meant to prevent the annuity purchase from becoming a gift to the couple's children or other heirs (the idea is that using the community spouse's life expectancy makes it unlikely that money would be left for heirs at the end of the community spouse's life).
There are a few other rules that annuities need to meet to be considered "Medicaid friendly annuities," or "Medicaid-compliant annuities."
In the past, many people took advantage of Medicaid's relaxed rules to buy annuities that would later go to their children after their death. For instance, some Medicaid applicants would transfer cash to relatives for an "annuity" in return for a promise by the relative to make payments to the community spouse in the future. Much of time, the bulk of the cash was passed on to the Medicaid recipient's heirs.
Today, all of the following requirements must generally be met when a Medicaid applicant purchases an income annuity for their community spouse:
The type of annuity used for Medicaid long-term care planning is known as a single-premium immediate annuity (SPIA), because the annuity is purchased with a lump-sum premium payment and it immediately begins paying back the premium in monthly payments to the owner (called the "annuitant").
A SPIA is a fixed annuity, meaning that the monthly payments to the community spouse are guaranteed to be the same each month (in what the IRS calls "substantially equal monthly payments").
The following types of annuities are not Medicaid-compliant:
Suppose a couple is $100,000 "over-resource" and wants to save this $100,000 to benefit the community spouse rather than spending it down. Here's how an annuity can help. The $100,000 is moved to the name of the community spouse. No problem so far, because the assets are still countable regardless of which spouse owns the assets, and the spouse applying for Medicaid is allowed to transfer unlimited assets to the community spouse.
Next, the community spouse purchases a single-premium immediate annuity (SPIA) from a commercial insurance company. This annuity is owned by the community spouse. Since it's an immediate annuity, the insurance company is contractually obligated to begin making a series of substantially equal monthly payments to the community spouse, based on the spouse's life expectancy.
Transferring a sum of money to buy an annuity doesn't violate Medicaid's asset transfer rules because the purchaser is getting something of equal value in return. (If you transfer something for less than its value during Medicaid's five-year look-back period, the agency can penalize you with a period of ineligibility.)
After an asset is turned into an income stream payable to the community spouse, the applicant qualifies financially for Medicaid. And since the money (in the above example, $100,000), is spent on something of equal value, it's not a gift that affects the Medicaid applicant's eligibility. (The annuity pays back the purchase price over a period over the life expectancy of the community spouse, eventually paying back the entire $100,000).
Even though the community spouse receives a monthly check that could accumulate into an asset if saved, this never jeopardizes the applicant's future eligibility, because once qualified, the Medicaid recipient must only show they don't have more than $2,000 in assets (in most states). The value of the assets (or the income) in the name of the community spouse is no longer a concern of Medicaid.
Medicaid has the right (and the responsibility, per federal law) to try to get paid back for the amount it has spent on the long-term care of anyone age 55 or over. Medicaid usually waits until a nursing home resident dies and then makes a claim against the resident's estate.
Because a Medicaid annuity wouldn't be part of the estate of the nursing home resident, Medicaid requires the annuity to name the state as a beneficiary of the annuity ahead of time, even though it belongs to the community spouse. Any money left in the annuity will go to the Medicaid agency after the community spouse dies (up to the amount Medicaid spent on the long-term care). This allows the Medicaid agency to collect any unpaid funds, should the community spouse die before their life expectancy.
Need a lawyer? Start here.