Dealing With Problem Assets in Medicaid Planning
Crisis Medicaid planning rarely begins with a perfectly clean balance sheet. When a client enters a nursing home, the goal is often to reduce countable assets, preserve as much of the estate as possible, and establish Medicaid eligibility as efficiently as the rules allow. The challenge is that some assets are much harder to work with than others.
Retirement accounts, deferred annuities, and existing immediate annuities can all create complications. In some cases, liquidating the asset can trigger a significant tax consequence. In others, the client may no longer have direct access to the underlying principal. These issues were the focus of a recent program I presented at National NAELA and later shared during a Krause Financial webinar: how to identify problem assets and determine the most practical way to address them in a Medicaid planning case.
Retirement Accounts and Medicaid Planning
IRAs and other qualified retirement accounts can be especially challenging because their Medicaid treatment varies by state. In many states, retirement accounts owned by either spouse are countable. Other states may exempt the community spouse’s IRA, while some provide broader exemptions. Because of these differences, the first step is always understanding exactly how the applicable state Medicaid agency treats qualified retirement assets.
When an IRA is countable, one option may be transferring the funds into a Medicaid Compliant Annuity, or MCA. The primary advantage is that the client may be able to avoid liquidating the entire account and recognizing all of the taxable income in a single year. Instead, when properly structured, the qualified funds can be transferred into the MCA and taxed as the annuity payments are distributed over time.
This can help reduce the impact of concentrating a large taxable event into one year, which may also affect the taxation of Social Security benefits and Medicare premiums. Transfers are generally handled through either:
- A trustee-to-trustee transfer, where the new carrier works directly with the existing custodian
- A 60-day rollover, where the client receives the funds and reinvests them within the applicable rollover period
Timing matters with either approach, particularly with trustee-to-trustee transfers, because the process depends on the existing custodian releasing the funds. In a crisis planning case, delays can have a meaningful financial impact.
Read More: How to Handle Retirement Accounts in Medicaid Planning
Crisis Medicaid Planning with Deferred Annuities
Deferred annuities create a similar issue for a different reason. These contracts are generally designed to accumulate value on a tax-deferred basis, and if the annuity has been in place for many years, it may contain substantial taxable gain.
Because a deferred annuity can typically be surrendered for its cash value, it is generally considered a countable asset for Medicaid purposes. For a smaller contract with limited gain, surrendering the annuity may be the simplest and most practical option. For a larger contract with significant appreciation, however, liquidation may create an unnecessary tax burden.
In those cases, a Section 1035 exchange may allow the client to move the deferred annuity directly into an MCA without immediately recognizing the entire gain. The funds move from the existing carrier to the new MCA carrier, and the taxable gain is generally recognized as the payments are distributed over the new annuity term.
This can allow the attorney to address the Medicaid eligibility issue while also spreading the taxable income over time. One important consideration is that a 1035 exchange does not eliminate surrender charges that may apply under the original contract, so those costs still need to be evaluated before proceeding.
How to Handle Existing Immediate Annuities in Medicaid Planning
Immediate annuities present a different challenge because once a contract has been annuitized, the owner typically no longer has access to the underlying principal. Instead, the owner has the contractual right to receive a stream of future payments.
That means the strategies available for IRAs and deferred annuities are generally no longer available. An existing immediate annuity typically cannot simply be surrendered for cash, and it usually cannot be exchanged directly into an MCA.
If the contract is not already Medicaid compliant, the next question becomes whether the remaining payment stream has value on the secondary market.
The original contract should be reviewed closely to determine:
- Whether the contract is assignable
- Whether ownership or beneficiary designations can be changed
- How many guaranteed payments remain
- What death benefit provisions apply
- Whether the contract was funded with qualified or nonqualified funds
This is an area we have spent a great deal of time developing at Krause Financial. We have helped transition more than $10 million of existing annuity contracts, and in many cases we purchase the contracts ourselves. Timing is critical in a crisis Medicaid case, and unnecessary delays can be costly, so participating directly in the transaction allows us to help keep the process moving efficiently.
We also work to establish fair market value by obtaining competing offers before a sale is completed. Our goal is to move the transaction forward quickly while making sure the client receives the strongest available offer. If your client has already received an offer from another purchaser or secondary-market company, we encourage you to check with us before committing. We are happy to review the contract to see whether we can improve on the offer or provide a more efficient path to closing. Once the annuity is sold, the client has cash available to continue the Medicaid spend-down strategy.
Learn More: Annuity Valuation
Timing and Tax Coordination Matter in Crisis Planning
One of the most important practical considerations in these cases is timing. Custodians and insurance companies often have their own forms, signature requirements, powers of attorney, and processing procedures. A missing signature, incorrect transfer form, or incomplete document can delay the transaction and potentially push Medicaid eligibility into another month.
Tax coordination is just as important. Whenever a retirement account or annuity has meaningful taxable exposure, we recommend involving the client’s CPA or tax professional before completing the transaction. The goal should be to solve the Medicaid eligibility problem without unnecessarily creating a separate tax problem.
The Bottom Line
A problematic asset does not necessarily mean the Medicaid plan has reached a dead end. It simply means the asset needs to be analyzed differently.
At Krause Financial, we help elder law attorneys evaluate retirement accounts, deferred annuities, and immediate annuities that may be complicating Medicaid eligibility. Depending on the facts of the case, the solution may involve a qualified transfer, a 1035 exchange, an annuity valuation and sale, or simply determining that liquidation is the most practical option.
Tom plays a primary role in the growth and development of our company. He provides the resources and vision for the company to create educational assets, reach sales goals, achieve marketing objectives, and accomplish everything we set out to do.
