I have received several questions through the Ask Dale section regarding the applicability of the Deficit Reduction Act of 2005 ("DRA") provisions on an annuity purchased by a spouse of an institutionalized individual. While the language contained within 42 U.S.C.A. § 1396p(c)(1)(G) seems to apply only to the "annuitant who has applied for medical assistance," most post-DRA states apply the provisions also to an annuitant that is the spouse of an individual who has applied for medical assistance.
Just to be clear, 42 U.S.C.A. § 1396p(c)(1)(G) states that "an annuity purchased by or on behalf of an annuitant who has applied for medical assistance with respect to nursing facility services or other long-term care services under this title [will be treated as a transfer of assets] unless the annuity --
- is irrevocable and non-assignable;
- is actuarially sound (as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration); and
- Provides for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments made."
However, nine post-DRA states1 do not require an annuity purchased by a community spouse to be irrevocable, non-assignable, actuarially sound, or provide equal payments. The provisions pertaining to designating the state Medicaid agency as a remainderman (42 U.S.C.A. § 1396p(c)(1)(F)) still apply. This means community spouses can still take advantage of balloon-style Medicaid Compliant Annuities in the select states that only apply 42 U.S.C.A. § 1396p(c)(1)(G) to institutionalized individuals.
A balloon-style Medicaid Compliant Annuity is an immediate annuity structured with very small monthly payments, with the exception of the last payment which is very large. Upon maturity, the final payment is paid to the insured. As an alternative, the insured may opt to have the final payment rolled into a new policy as a means to maintain program eligibility. Why would a community spouse want to take advantage of a balloon-style Medicaid Compliant Annuity? In light of the very small monthly payments derived from the balloon-style Medicaid Compliant Annuity, the community spouse may receive a large income diversion from the institutionalized spouse. Of course, this will vary depending on the community spouse's income level and the applicable monthly maintenance needs allowance.
Meet John and Jan Portman.
John and Jane are each 84 years of age, and reside in Charleston, West Virginia. John has been struggling with Parkinson's disease, and Jane realizes she can no longer care for him in their home. In June of 2010, John enters a nursing home.
John and Jane's Countable Resources.
The Portmans, together, have countable resources of $230,000. The countable resources consist of a checking account valued at $150,000, stocks and bonds valued at $40,000, and a savings account valued at $40,000.
John and Jane's Protected Resources.
Under the West Virginia Medicaid Program, Jane, as the community spouse, is entitled to retain the family home, one automobile, standard household furnishings and personal property, and $109,560 of cash or other assets. At the same time, John, as the institutionalized spouse, is entitled to retain his personal property, and $2,000 of cash or other countable resources.
John and Jane's Spend-Down Amount.
With the total countable resources of $230,000 being reduced by the protected resources of $111,560, the net difference equals the spend-down amount, or $118,440. However, in order to avoid the edge of Medicaid eligibility, the Portmans, together, retain no more than $105,000 of countable resources. As such, the net spend-down amount is increased to $125,000.
Balloon-Style Medicaid Compliant Annuity.
In order to eliminate the net spend-down amount, and to immediately qualify John for West Virginia Medicaid benefits, Jane purchases a balloon-style Medicaid Compliant Annuity in October of 2010. With Jane being 84 years of age, her West Virginia Medicaid life expectancy is 6.88 years / 82.56 months. In light of the above, Jane would receive the following guaranteed monthly payments:
| Investment Amount |
Monthly Pay-Out |
Balloon Payment |
Total Pay-Out |
| $125,000.00 |
$133.01 |
$124,931.01 |
$133,446.82 |
John and Jane's Monthly Co-Pay.
With the aforementioned balloon-style Medicaid Compliant Annuity in place, John will qualify for West Virginia Medicaid benefits in October of 2010. Additionally, with Jane having a monthly maintenance needs allowance ("MMNA") of $2,739, and with her total monthly income of $500, Jane has a monthly income shortfall of the difference, or $2,239. With this amount being shifted from John's monthly income of $2,200, his net monthly Medicaid co-pay to the nursing home equals $0.
Additionally, in November of 2010, when Jane receives her first monthly payment from her balloon-style Medicaid Compliant Annuity of $113.01, her monthly income will increase to $613.01. With her total monthly income still below her MMNA of $2,739, she has a monthly income shortfall of $2,125.00. With this amount being shifted from John's monthly income of $2,200, his net monthly income equals $74.01. With his net monthly income being reduced by his $50 monthly personal needs allowance, his monthly Medicaid co-pay to the nursing home equals $24.01.
John and Jane's Monthly Savings.
With John paying approximately $6,538 per month for his nursing home care, by qualifying for West Virginia Medicaid benefits in October of 2010, and with his Medicaid monthly co-pay being $0, the Portmans will experience a 100% savings. In November of 2010, and each month thereafter, with John's monthly Medicaid co-pay increasing to $24.01, the Portmans will save $6,513.99 per month.
Interesting Planning Points:
- Should John and Jane decide not to proceed with the aforementioned balloon-style Medicaid Compliant Annuity plan, and instead continue to privately pay for John's nursing home care, John and Jane will exhaust their entire spend-down amount in approximately 19.12 months.
- By opting to proceed with the aforementioned balloon-style Medicaid Compliant Annuity plan, John will obtain immediate Medicaid eligibility, and potentially save $124,547.482.
- Had John and Jane opted to proceed with a level-pay Medicaid Compliant Annuity in lieu of the balloon-style plan, John's co-pay would have been $1,488.463, resulting in a monthly savings of $5,049.54. This is a savings of $1,464.454 less per month than the balloon-style Medicaid Compliant Annuity plan.
- In a community spouse case, the typical concern is that upon the death of the community spouse any residual benefits remaining in a Medicaid Compliant Annuity will revert to the state Medicaid program. Likewise, in the example above, if Jane does not survive the 82-month term of her balloon-style Medicaid Compliant Annuity, the West Virginia Medicaid Program would be entitled to collect the residual benefits remaining in her Medicaid Compliant Annuity, up to the extent that medical assistance benefits were provided to John. In light of this, some couples opt to shorten the term of their annuity to ensure that the community spouse will outlive the term.
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1 The following states do not require a Medicaid Compliant Annuity purchased by a community spouse to provide equal monthly payments: Florida, Indiana, Louisiana, Maryland, Mississippi, South Dakota, Virginia, West Virginia, and Wisconsin.
2 This amount was determined by multiplying John's monthly savings from the balloon-style Medicaid Compliant Annuity plan of $6,513.99 by the 19.12-month time-frame that John would have privately paid throughout.
3 This amount was determined by the following:
$1,577.46 level-pay Medicaid Compliant Annuity pay-out
+ $500.00 Jane's monthly income
$2,077.46 Total Income
- $2,739.00 Jane's MMNA
-($661.54) Monthly Shortfall / Diversion to Jane from John's Income
+ $2,200.00 John's Monthly Income
$1,538.46 John's Net Monthly Income
- $50.00 John's Personal Needs Allowance
$1,488.46 John's Monthly Medicaid Co-Pay
4 This amount was determined by deducting the level-pay plan monthly savings of $5,049.54 from the balloon-style plan monthly savings of $6,513.99.
Copyright ©2010 Krause Financial Services, Inc.
