What if the Owner of a Medicaid Compliant Annuity Passes Away?

Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.

In most cases, the purchase of a Medicaid Compliant Annuity requires the State Medicaid agency be named primary beneficiary up to the amount of benefits expended on behalf the of the institutionalized person.  If the owner outlives the annuity term, the contract terminates, and the State is not entitled to any funds from the annuity.  However, if the owner predeceases the annuity term, a portion or all of the remaining balance may be recovered by the State, potentially leaving nothing for the contingent beneficiaries.


What if a single person predeceases their Medicaid Compliant Annuity?

In a case involving an unmarried individual, the State Medicaid agency must be named primary beneficiary, unless the individual has a minor or disabled child. Most often, the gift/annuity strategy is used in a single person case.  This involves the individual purposely divesting approximately half of his or her countable assets, and using the other half to purchase an annuity to help pay through the penalty period.


In this scenario, should the individual predecease the annuity term/penalty period, the State would be unable to recover any remaining balance in the annuity, as no benefits were provided during the period of ineligibility.  However, if the person had previously received Medicaid benefits, the State would have a claim in the annuity.


What happens in a Married Couple case?

In a typical married couple case, the community spouse purchases an annuity with any excess countable assets for his or her own benefit.  In most situations, the State Medicaid agency must be the primary beneficiary.  If the institutionalized spouse has already passed upon the death of the community spouse, the State Medicaid agency will be entitled to recover funds up to the amount expended on behalf of the ill spouse. 


However, if the community spouse predeceases the institutionalized spouse, and the institutionalized spouse is still receiving benefits, the State may leave its claim open with the insurance company, and not collect as the primary beneficiary until after the individual passes away.


What can be done to prevent the State’s recovery of the annuity?

While not much can be done to prevent the recovery of an unmarried individual’s residual annuity balance (assuming Medicaid benefits were provided to that individual), there are measures that can be taken to minimize this risk in cases involving married couples:


1. Shorten the Annuity Term:  The State Medicaid agency is only entitled to recover benefits from the annuity if the community spouse predeceases the term.  A Medicaid compliant annuity must be “actuarially sound” – i.e., it must pay out within the owner’s Medicaid life expectancy.  It places a maximum on the length of the annuity, but it does not place a minimum.* The annuity can be structured with a shorter term and it will still satisfy this requirement.  As such, consider using an annuity term the community spouse is more likely to outlive.  Typically, 24-48 months is considered reasonable for most cases, though we do have the ability to utilize terms less than 24 months in length (in most states) for situations where the longevity of the community spouse is questionable.


2. Name the Institutionalized Spouse as Primary Beneficiary:  A handful of states allow for the institutionalized spouse to be named primary beneficiary ahead of the State Medicaid agency.  Therefore, if the community spouse predeceases both the annuity term and the institutionalized spouse, that spouse will inherit the residual balance, rather than the State. 


Some Medicaid planners may be reluctant to name the institutionalized spouse as primary beneficiary for fear the inheritance would disrupt his or her Medicaid benefits, however, additional crisis planning can be done to save some of these funds, rather than risk losing the entire amount to the State Medicaid agency.  For more information on these states and strategies, see our recent blog regarding naming the Institutionalized Spouse as Beneficiary to the State.


Crisis Medicaid planning always involves a level of uncertainty.  The success of the strategy being used is dependent upon factors that are constantly changing – the health of either spouse, the level of care required, etc.  Although the future is never guaranteed, Krause Financial Services is here to help you take all factors into consideration, as well as their potential outcomes, in order to implement the best plan possible for your clients.  For more information, contact a Benefits Planner today.


*This does not apply to North Dakota, Oregon, and Washington.  For more information on the “actuarially sound” requirement in these states, please contact a Benefits Planner at 866-605-7437.


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