The legislation regarding annuities contained within the Deficit Reduction Act of 20051 ("DRA") seems to apply only to the "annuitant who has applied for medical assistance." However, most post-DRA states apply the provisions also to an annuitant that is the spouse of an individual who has applied for medical assistance.
Notwithstanding the above, a handful of post-DRA states do not requires an annuity purchased by a community spouse to be irrevocable, non-assignable, actuarially sound, and provide equal payments. The provisions pertaining to designating the state Medicaid agency as a remainderman still apply2. This means community spouse can take advantage of balloon-style Medicaid Compliant Annuities in the select states that do not apply DRA in its entirety to spousal annuity purchases.
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 insured3. 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 Clarence and Martha.
After a long struggle with Alzheimer's, Clarence entered a Florida nursing home on January 1, 2012. Together, he and his wife Martha have a home, standard furniture and personal property, one car, prepaid funeral plans, and $245,000 in non-IRA bank accounts. Clarence has monthly income from social security and pension of $2,300 while Martha has monthly income from social security of $500. Clarence's nursing home bill is expected to be $6,200 per month. Martha would like to immediately qualify Clarence for Florida Medicaid benefits.
The Balloon-Style Medicaid Compliant Annuity.
Of the countable resources, Martha is allowed to keep no more than $113,640 as her community spouse resource allowance, and Clarence is allowed to keep $2,000 as his institutionalized individual resource allowance. After the protected resources are taken into consideration, the spend-down amount is $129,360. With Martha being 79-years-of-age she is allowed to purchase a balloon-style Medicaid Compliant Annuity with a period certain of 1194 months. With an investment amount of $129,360, the balloon-style Medicaid Compliant Annuity will provide income to Martha of $116.32 for 188 months, with the final balloon payment of $128,286.32 occurring in month 119.
Medicaid Eligibility.
If Martha purchases the annuity in February of 2012, the spend-down amount is eliminated and Clarence is immediately eligible for Florida Medicaid benefits. As a result, in February of 2012 and each month thereafter Clarence's Medicaid co-pay is $40.32. This amount was determined by reducing Clarence's monthly income of $2,300 by the $2,224.68 that was shifted to Martha, and his $35 monthly personal needs allowance.
Economic Results.
With Clarence and Martha expecting to pay $6,200 per month for Clarence's nursing home care, by immediately qualifying for Medicaid benefits Clarence and Martha will save $6,159.68 in February of 2012, and each month thereafter.
Advantages of the Balloon-Style Medicaid Compliant Annuity Plan.
Clarence obtains immediate Medicaid eligibility and is able to contribute to Martha's income so that she may continue to reside in the community as long as possible. Had Martha opted to proceed with a level-pay Medicaid Compliant Annuity in lieu of the balloon-style Medicaid Compliant Annuity, Clarence's co-pay would have been $1,066.05, resulting in a monthly savings of $5,133.95. This is $1,025.73 less per month than the balloon-style Medicaid Compliant Annuity plan.
Disadvantages of the Balloon-Style Medicaid Compliant Annuity Plan.
If Martha predeceases the 119-month period certain of her balloon-style Medicaid Compliant Annuity the Florida Medicaid program will be entitled to be reimbursed for the Medicaid expenses paid on behalf of Clarence5. In such an event, Martha's balloon-style Medicaid Compliant Annuity may leave little or no residual benefits to intended heirs.
Alternate Balloon-Style Medicaid Compliant Annuity Option.
In that the Florida Medicaid program does not have a restrictive definition of "actuarially sound6" Martha may want to reduce the period certain of her balloon-style Medicaid Compliant Annuity to ensure that she will outlive the term. Unlike a level-pay Medicaid Compliant Annuity, decreasing the term of a balloon-style Medicaid Compliant Annuity changes the monthly pay-out on a very miniscule basis - usually only pennies. Should Martha opt for a 60-month term instead of the previously outlined 119-month term her monthly pay-out would only increase by $0.49.
Interesting Planning Points.
- Should Martha decide not to proceed with the aforementioned balloon-style Medicaid Compliant Annuity plan and instead continue to privately pay for Clarence's nursing home care, Clarence and Martha will exhaust their entire spend-down amount in approximately 33 months.
- Should Martha's financial needs change (i.e. her health deteriorates and she transfers to an assisted living facility) she may require a greater amount of income than the balloon-style Medicaid Compliant Annuity provides. At any time during the pay-out period of the balloon-style Medicaid Compliant Annuity, Martha may elect to convert the balloon-style Medicaid Compliant Annuity into a level-pay Medicaid Compliant Annuity; this is a one-time election.
- If Martha's balloon-style Medicaid Compliant Annuity is nearing maturity and Martha decides it is not in her best interest to receive the final balloon payment, she may elect to continue/rollover the balloon-style Medicaid Compliant Annuity into another policy, taking her new life expectancy into consideration.
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1 42 U.S.C. § 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 -- (1) is irrevocable and non-assignable, (2) is actuarially sound, and (3) provides for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments made."
2 42 U.S.C. § 1396p(c)(1)(F).
3 As an alternative, the insured may opt to have the final payment rolled into a new policy as a means of maintaining program eligibility- should the community spouse require institutionalization and Medicaid benefits.
4 Martha's Florida Medicaid life expectancy is 9.92 years/119.04 months.
5 This is true whether or not Clarence is still int he nursing home at the time of Martha's death.
6 To date three states have redefined the term "actuarially sound." In North Dakota the term means "within 85% of the individual's Medicaid life expectancy." In Oregon the term means "within twelve months of the individual's Medicaid life expectancy." In Washington, the term means "if the individual's Medicaid life expectancy is more than five years - no less than five years, and if the individual's Medicaid life expectancy is less than five years - the actual life expectancy."
