White-Water Rafting on the Income Stream

This is the third of five columns describing strategies to protect the financial security of married persons whose spouses are in nursing care. This column and the next two each explain the pros and cons of one plan, how it works, and in what states it is available. This column discusses how a community spouse may preserve $50,000 to $500,000 in excess funds by putting the money in an immediate, irrevocable annuity.

In prior posts, we met Sam and Hazel. Sam recently became a nursing home resident and will not be returning home. His monthly nursing home bill is $8,000, far above their combined income. They have a homestead worth $200,000 (even at today’s depressed home values) and $200,000 in savings. This puts Sam and Hazel well above median household net worth of around $180,000, but spending $8,000 a month just for Sam’s care will deplete their savings rapidly.

The Medicaid agency tells Hazel that their home is not counted and Sam could be eligible for Medicaid when half of their savings has been expended on his care. Hazel would like to know if there is an alternative plan that would allow her to keep more of their savings. One way would be to purchase a Medicaid-friendly immediate annuity. An immediate annuity is one which has been converted to an income stream and cannot be liquidated in a lump sum. An annuity that is not being paid out is called a deferred annuity.

Annuities, are usually “annuitized” to provide a source of income. However, they may be used to shelter assets to create Medicaid eligibility. The federal Medicaid agency devised rules to permit retirees to keep annuities purchased as part of a retirement plan but to punish those who purchase annuities that the government considers abusive. These rules were set forth in a regulation called Transmittal 64. An annuity is permitted if all required payments are equal and are expected to be received within the actuarial life expectancy of the annuitant.

In a nutshell, a Medicaid-friendly annuity must meet seven requirements:

A) It is irrevocable and unassignable,
B) It has no cash value,
C) It is purchased at fair market value,
D) It is commercially available,
E) All payments are equal and there is no balloon payment at the end,
F) All required payments fall within annuitant’s actuarial life expectancy, and
G) The state must be named as beneficiary on death of annuitant to repay Medicaid.

The annuity strategy works because A) the Social Security Act does not allow the state Medicaid program to penalize transfers or gifts from one spouse to – or for the benefit of – the other, and B) it exempts the community spouse’s income from being considered available to pay for the care of the spouse in the nursing home.

Regarding the first prong, federal law specifically states as follows:

An individual shall not be ineligible for medical assistance . . . to the extent that . . . assets were transferred to the individual’s spouse or to another for the sole benefit of the individual’s spouse, [or] were transferred from the individual’s spouse to another for the sole benefit of the individual’s spouse. 42 USCA § 1396p(c)(2)(B).

Concerning the other prong, it says, “No income of the community spouse shall be deemed available to the institutionalized spouse. 42 USCA § 1396r-5(b)(1).

In simple terms, federal law allows the community spouse to purchase an actuarially-sound immediate annuity to protect excess funds and the income from that annuity does not need to be used to pay for the care of the other spouse, once Medicaid kicks in.

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The U.S. Third Circuit Court explained why an immediate annuity which has been used to turn an asset into an income stream is not available and the Community Spouse is neither obligated to share the distributions nor to offer the income stream for sale on a secondary market. James v. Richman, 547 F.3d 214 (3rd Cir. 2008). Counting the annuity as an asset would undermine rule that “no income of the community spouse shall be deemed available to the institutionalized spouse,” according to that decision. 547 F.3d at 219.

Not all states conform to federal law concerning the use of annuities to protect assets for the community spouse. States that place restrictions on the use of Transmittal 64-compliant annuities–generally limiting annuities to funds that are part of the community spouse’s resource allowance–include: Alabama, Arkansas, Colorado, Connecticut, Indiana, Louisiana, Minnesota, Nevada, New Jersey (although it is part of the Third Circuit and should be bound by James), North Dakota, Texas, and Wisconsin. It is likely that these non-conforming states will be challenged and forced to reform their Medicaid programs.

For more information about Medicaid annuities, or for a referral to an Elder Law attorney in your state, please call either of the numbers below or visit my website and click on the “contact” button.


John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
©2011 John B. Payne, Attorney