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Many of the "Ask Dale" inquiries that I have received throughout the past week have been regarding the requirement of the beneficiary designations on Medicaid Compliant Annuities consisting of tax-qualified investments.  At one time it was a federal rule that a state Medicaid agency was not required to be made a remainderman on annuities holding tax-qualified funds; however, this is no longer the case.

Most post-Deficit Reduction Act of 2005 ("DRA") states have dictated their own requirements regarding the beneficiary rules of tax-qualified annuities.  For the states that still do not require the Medicaid agency to be a beneficiary of the policies, an obvious planning opportunity exists.

In most states, an IRA or a tax-qualified fund is considered a countable resource.  Thus, the IRA will have to be spent down in order to obtain Medicaid eligibility.  In many cases the planner who is unfamiliar with Medicaid Compliant Annuity planning liquidates any existing tax-qualified accounts, subjecting the client to an early withdrawal penalty and immediate income taxation of the entire liquidated amount.

Rather than subjecting the client to this outcome, the preferred planning method would be to make the IRA, or tax-qualified fund, an exempt resource.  This can be accomplished by converting the resource into an income stream by way of a Tax-Qualified Medicaid Compliant Annuity.  The tax-qualified funds can be transferred either by way of an IRA Transfer (direct plan administrator to plan administrator transfer), or an IRA Rollover (the 60-day rollover rule), from the current custodian company to the Medicaid Compliant Annuity company.

In order to meet the requirements of DRA, the Tax-Qualified Medicaid Compliant Annuity will be irrevocable, non-assignable, provide equal payments, and be actuarially sound.  However, the last requirement of making the state Medicaid agency a beneficiary of the policy is not required in many states; thus the primary beneficiary can be a spouse, child, or whomever the applicant deems appropriate.

Again, this requirement varies from state to state.  For more information on whether the state you practice in applies the requirement to designate the state Medicaid agency on tax-qualified funds, please contact a representative of Krause Financial Services or submit an inquiry on the Contact Us page.

This blog is intended for elder law attorneys.  Krause Financial Services always recommends that an applicant seeks the counsel of an experienced elder law attorney, licensed in the applicable state.