Choosing an appropriate term for your client’s Medicaid Compliant Annuity (MCA) hinges on several factors, including the client’s marital status, their health, or the type of account they need to spend down. By reviewing the components of each Medicaid spend-down strategy, attorneys and their clients can better understand what to consider when choosing an appropriate MCA term.
For married clients, the designated owner of the policy and the type of assets being used to fund the MCA will determine how much flexibility your client has when it comes to choosing the term.
#1) Community Spouse MCA
With this strategy, the community spouse can use their excess countable assets to purchase an MCA. The community spouse is listed as the owner, annuitant, and payee of the policy.
Despite the requirement that the MCA term is actuarially sound, this strategy allows the policyholder the greatest flexibility when it comes to choosing an annuity term. As long as the term is equal to or less than the community spouse’s Medicaid life expectancy, the term can be structured as short or as long as needed.
A shorter-term annuity (2-24 months) may be appropriate if the community spouse:
- Requires significant monthly income;
- Is in questionable health;
- Is not entitled to a shift in income under the MMNA rules;
- Is concerned about estate recovery.
Whereas a longer-term annuity (25+ months) may be more appropriate if the community spouse:
- Is in good health;
- Has a family history of longevity;
- Might be eligible for a shift of income under the MMNA rules;
- Is using tax-qualified funds to purchase the MCA.
#2) Institutionalized Spouse MCA
A second option for married couples is to purchase the MCA in the name of the institutionalized spouse. In doing so, the couple can take advantage of the favorable beneficiary designation rules by naming the community spouse as the primary beneficiary ahead of the state Medicaid agency. An additional benefit of this strategy is that it can be used to maximize the shift of income from the institutionalized spouse to the community spouse under the Monthly Maintenance Needs Allowance (MMNA) rules.
When using this strategy, the annuity term should be structured using the institutionalized spouse’s full Medicaid life expectancy. This allows the applicant the ability to minimize the income that is being produced by the MCA each month and allow as little as possible to be included as part of their co-pay. Additionally, should the institutionalized spouse predecease the annuity term, the greatest residual amount possible will become available to the community spouse as the primary beneficiary.
Learn More: What is the MMNA?
#3) Name on the Check Rule
If the institutionalized spouse owns a traditional IRA that must be spent down, the Name on the Check Rule can be a beneficial strategy. The Name on the Check Rule allows the institutionalized spouse to annuitize their tax-qualified account without immediate tax consequences and make the income payable to the community spouse. The institutionalized spouse becomes the owner and annuitant of the MCA and lists the community spouse as the payee of the policy. Although it is not required for Medicaid compliance, it is recommended that the annuitant’s full Medicaid life expectancy be used as the annuity term to stretch the tax implications over multiple tax years.
#1) Gift/MCA Plan
This strategy often referred to as the “Half-a-Loaf” Plan, is a popular planning strategy among single applicants. The goal of the Gift/MCA plan is to create an immediate wealth transfer to the applicant’s intended beneficiaries using a portion of their excess funds. This divestment will trigger an intentional penalty period. The remaining funds are then used to purchase an MCA to help the client privately pay for care during the penalty period.
Since the MCA term is structured to be congruent with the penalty period, there is very little flexibility in choosing the annuity term. The MCA is structured so that the annuity contract is terminated when the penalty period ends.
#2) Standalone Plan
In the Standalone Plan, the applicant will fund the entirety of their excess countable assets into an MCA, thus immediately qualifying for Medicaid benefits. However, since the income payments from the MCA will become part of their Medicaid co-pay each month, the MCA payments should be as minimal as possible. To do this, the MCA term should be structured using the applicant’s full Medicaid life expectancy.
Structuring the MCA term shorter than their full Medicaid life expectancy could result in an increased co-pay to the nursing home each month and even result in the applicant’s income exceeding their care needs. Since the economic benefit of this strategy is dependent on the lifespan of the Medicaid recipient, the longer the individual lives, the fewer residual benefits are available for the beneficiaries.
Reviewing the spend-down options and discussing with your client their income needs, health concerns, and overall financial goals can help you to determine an appropriate term length that will best meet their needs. If you have questions about a client’s financial situation and need help determining an appropriate spend-down option and MCA benefit term, contact our office or schedule a call with one of our advisors today!