What’s the Risk of Estate Recovery on Medicaid Compliant Annuities?

When incorporating a Medicaid Compliant Annuity (MCA) into a client’s crisis plan, attorneys must carefully assess and make their clients aware of all potential implications, including the risk of estate recovery. While the requirement to name the state Medicaid agency as a beneficiary often raises concerns, understanding how and when estate recovery applies can help you better advise your clients and protect their assets.

Why the State Must Be a Beneficiary

To meet Medicaid’s strict compliance standards under the Deficit Reduction Act, an MCA must name the state Medicaid agency as a beneficiary. For single applicants, the state is typically listed as the primary beneficiary. However, certain exceptions exist, such as when the MCA owner has a minor or disabled child, in which case the child may be named as primary beneficiary ahead of the state.

However, it’s important to remember that the state’s recovery is limited to the amount of benefits actually paid on behalf of the institutionalized individual.

Exceptions: Naming Another Party as Beneficiary

When an MCA is purchased by the institutionalized spouse, the state can be listed as a contingent beneficiary. This allows the community spouse to be named primary, preserving any remaining annuity value for their own use or eventual inheritance planning in the event their spouse predeceases the MCA. Again, a minor or disabled child may also be listed ahead of the state.

These exceptions provide important flexibility when structuring the annuity in married couple cases, allowing for asset preservation while still satisfying Medicaid eligibility rules.

Read More: How to Choose the Right MCA Term for Your Client

Estate Recovery Risk in Practice

So how much estate recovery risk are your clients actually facing when using an MCA?

The reality is, in most cases, the risk is minimal as long as the annuity is properly structured and the strategy is executed correctly.

• For single individuals utilizing the Gift/MCA strategy, the annuity is generally used to privately pay for care during the penalty period created by a divestment made to loved ones. If the client doesn’t receive Medicaid benefits during the annuity term, there is no recovery since the state paid nothing.
• If Medicaid benefits were received, the state was named primary beneficiary, and the MCA owner dies before the annuity term ends, the state may claim repayment from any remaining balance. However, this can typically be anticipated in the planning process.
• For married couples, proper term selection and health analysis for the community spouse can minimize the chance of predeceasing the MCA term, effectively lowering the chance that the state will have a recovery opportunity.

Read More: What Happens If the Owner Passes Away Before the MCA Term Ends?

Structuring the MCA to Minimize the Chance of Estate Recovery

As the advising attorney, your role is critical in:

• Evaluating life expectancy to determine a realistic annuity term
• Navigating beneficiary designations in accordance with Medicaid rules
• Timing the annuity purchase relative to Medicaid application and penalty periods
• Making clients aware of the estate recovery risk of their MCA strategy

MCA Benefit > Risk of Estate Recovery

While estate recovery is a valid concern, it rarely outweighs the advantages of using an MCA in a crisis planning scenario. For clients who would otherwise spend down or lose assets to long-term care costs, the MCA provides a way to convert countable assets into a protected income stream, often securing thousands of dollars in value for a spouse or heir.

If you’d like help assessing the estate recovery implications of an MCA or need assistance structuring an MCA in a specific case, contact our office.