Deferred Annuities in Crisis Medicaid Planning

Jim Wolverton, J.D.

Disclaimer: Since Medicaid rules and insurance regulations are updated regularly, past blog posts may not present the most accurate or relevant data. Please contact our office for up-to-date information, strategies, and guidance.

As part of their overall investment strategy, some clients may choose to purchase a tax-deferred annuity as a way to secure a reliable income stream during retirement.  However, these financial products can be a headache when it comes to Medicaid qualification.  In this article, we will discuss the features of these products, how they are treated by Medicaid, and what options are available to your clients when they’re trying to qualify for long-term care Medicaid quickly.

Read More: How to Pay for Long-Term Care


What are tax-deferred annuities?

Very simply, a tax-deferred annuity is an annuity that has not yet been annuitized. The policy is often funded with a single premium that is invested with an insurance company. The policy will continue to generate growth until it reaches the date of annuitization. Once the policy has reached the annuitization date, it will begin making regular payments back to the purchaser. The growth earned on the invested amount continues to accumulate as long as it is in a deferred status resulting in those gains being compounded into greater investment benefits.  The growth earned on the policy then becomes taxable upon distribution.  These annuities are an attractive investment strategy because they remain in a tax-deferred status until annuitization at which time they provide a consistent and steady stream of income so retirees can properly budget to avoid outliving their money during retirement.


How can tax-deferred annuities impact a client’s plan for Medicaid qualification?

Most states include the investment amount or accessible cash value portion of a tax-deferred annuity as a countable resource for Medicaid purposes. Any income received from the annuity once it has been annuitized is considered income to the Medicaid applicant. This is an obstacle elder law attorneys will have to overcome to help their clients accelerate their eligibility for long-term care Medicaid.  However, liquidating these policies can cause negative tax implications for the client.

Learn More: How Existing Non-Compliant Annuities Affect Medicaid Eligibility


What options do clients have with a deferred annuity in crisis Medicaid planning? 

Liquidate the Policy.

First, the client could liquidate the policy to get the full investment and interest back at once.  However, most insurance companies will charge a surrender penalty for early withdrawal and taxes will be immediately due on any gain upon distribution.  The client could then invest the remaining proceeds into a Medicaid Compliant Annuity (MCA) to accelerate their eligibility for Medicaid benefits. This is an option usually taken when the annuity has accrued very little gain so the tax burden is low and the surrender charges are not overwhelming.

Read More: The Rules of a Medicaid Compliant Annuity

Transfer the Policy.

Second, if the annuity is currently in a deferred payout status and has generated a substantial amount of interest, a 1035 tax-free exchange into an MCA could be an option to explore.  This option will help avoid the immediate tax consequences of liquidating the policy and the annuity would no longer be considered a countable resource for Medicaid qualification purposes.  There may still be surrender charges from the original annuity holder for early withdrawal.  However, once the annuity has been annuitized, the policy’s cash value is no longer accessible and can no longer be converted to an MCA using the 1035 tax-free exchange.

Sell at Fair Market Value.

Third, if an annuity has been annuitized it can no longer be surrendered or exchanged, it could be sold on the secondary market for fair market value.  Krause Financial Services (KFS) works with purchasers of these types of annuity contracts to receive purchase offers to present to the client.  KFS is also a buyer of these contracts, and if purchasing the existing contract, we will expedite the sale of the contract to ensure Medicaid qualification is not delayed. Upon receipt of the proceeds, the client would then be able to invest those funds into an MCA or complete a spend-down.


Interested in learning more about how tax-deferred annuities can impact your client’s Medicaid crisis plan? Log in to your Attorney Access account to view our on-demand webinar today!


Jim Wolverton, J.D.
By Jim Wolverton, J.D. | Director of Legal Education

Jim is responsible for creating, curating, and promoting high-quality content related to the estate planning and elder law industry. He also plays a primary role in designing and maintaining a robust education and content calendar for Attorney Access.

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