Evaluating Annuities for Medicaid Eligibility

Krause Financial
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For many seniors, annuities are an attractive option to secure a steady income during retirement. However, when it comes to Medicaid eligibility, not all annuities are created equal. Evaluating annuities for Medicaid eligibility can be a complex task that requires a deep understanding of both Medicaid regulations and annuity structures. Below are a few key aspects that elder law attorneys should consider when evaluating annuities for their clients’ Medicaid planning needs.

Understanding Annuities and Medicaid

An annuity is a financial product that provides a guaranteed income stream over a specified period or for the lifetime of the annuitant. Annuities can either begin making payments to the payee immediately (immediate annuity) or defer payments while they accumulate growth (deferred annuity). Once an annuity begins making payments to the designated payee, the policy becomes annuitized and can no longer be modified.

When reviewing the structure of an annuity, look for crucial features such as the payout terms, deferral period, surrender charges, and whether the annuity is fixed or variable. These factors will help you determine the type of annuity your client owns as well as their options to preserve the asset while accelerating their eligibility for Medicaid.

Medicaid Compliant Annuities

A Medicaid Compliant Annuity (MCA) is a specifically designed immediate annuity that meets the requirements of Medicaid eligibility. These annuities must adhere to the specific guidelines set forth by the Deficit Reduction Act of 2005, including irrevocability, actuarial soundness, non-assignable, providing equal payments, and naming the state as the remainder beneficiary. Annuities that do not meet these requirements are considered non-compliant and may jeopardize your client’s Medicaid eligibility.

Non-Compliant Annuities

Non-compliant annuities do not meet the necessary requirements for Medicaid eligibility purposes and will be treated by Medicaid as either a divestment or a countable asset. Depending on the type of annuity your client owns, they may be able to liquidate, transfer, or sell the policy.

Tax-Deferred Annuities: In most cases, a tax-deferred annuity will be considered a countable asset for Medicaid purposes because the policy often contains an accessible cash value. To accelerate eligibility, clients can typically either liquidate the contract or transfer the policy to fund a Medicaid Compliant Annuity. When transferring the policy, the policyholder can utilize Section 1035 Tax-Free Exchange to avoid incurring any immediate tax consequences from the liquidation of the policy. However, they may still be liable for any surrender charge or penalties.

Immediate Annuities: Immediate annuities are policies that were either purchased as immediate policies or deferred annuities that have been annuitized. Policies that have been annuitized and are in a payout status are often treated as a divestment or improper transfer for Medicaid purposes. However, in some cases when an immediate annuity policy remains revocable and assignable, it will likely be treated as an available asset for Medicaid eligibility purposes because the client can transfer the policy. For clients who are assessed a period of ineligibility due to the purchase of the annuity, their only option for accelerating Medicaid eligibility is typically to sell the policy on the secondary market and spend down the proceeds.

Working with Experienced Annuity Providers

Collaborating with experienced annuity providers is vital to ensure your clients receive an annuity policy that meets their needs and adheres to the necessary requirements when achieving Medicaid eligibility. Working with a provider like Krause Financial, which has a track record of successfully guiding elder law attorneys and their clients through the annuity valuation process, is a great resource to evaluate existing annuities or look to purchase a Medicaid Compliant Annuity as your clients prepare their Medicaid crisis plan.  If you have a client that owns any type of annuity please contact our office for a complimentary review of the contract!

To learn more about annuities and Medicaid planning, hear from our President and CEO Dale Krause in one of our on-demand webinars!

Krause Financial
By Krause Financial | Staff
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