The Golden Years?

Medicaid annuities may help clients preserve their assets, even if they're already in a nursing home.

Our society insures against auto and homeowner's damage, theft, earthquakes, fire, and floods. All of these types of insurance are important, but the likelihood of someone needing long-term care at some point in their lives is many times greater than that of any other potential insurance claim. And, as this country's baby boomers get closer to retirement, long-term care (LTC) will only grow in importance.

While financial advisers often recommend purchasing long-term-care insurance (LTCI) to cover the costs of LTC, many clients don't have the money to purchase LTCI and those that do may be too frugal to do so. But if your clients don't buy LTCI, how are they going to be able to pay for future LTC needs?

Medicare is available for some limited assistance with home nurse visits and other home-based activities. As a general rule of thumb, however, clients should not rely on Medicare as a long-term source of financial help when it comes to nursing home care.

When Medicare stops paying, or in the event the client was never available to receive Medicare coverage, the client must fund the cost of care privately. Nursing home residents can use their own retirement savings and personal assets to pay for the cost of care. By doing so, though, clients could deplete all of their assets before they die.

If a client doesn't have the money to pay for nursing-home care or didn't have the money or foresight to buy LTCI, Medicaid is the only remaining alternative. Medicaid has traditionally been reserved for the poor, therefore requiring that a person's assets or personal wealth be spent down before the patient may become eligible.

While the United States may be the only industrialized country that requires its citizens to impoverish themselves in order to receive governmental assistance for long-term-care expenses, the federal rules associated with Medicaid do allow tremendous latitude.

One of the most widely held myths of people facing long-term care is that they cannot give away assets in order to qualify for Medicaid coverage. Quite the opposite, in many preplanning cases, gifting or divesting assets is often an appropriate method to preserve assets.

Transfers of assets to third parties are considered gifts or "divestments." It is vitally important for clients to understand that states can "look back" to find divestments of these assets for 36 months prior to the date the patient is institutionalized or, if later, the date the patient applies for Medicaid assistance. For certain trusts, the look-back period extends to 60 months.

Medicaid (or MediCal if you live in California) rules generally require that certain types of assets held by a patient, a patient's spouse, or jointly with non-spouses, be considered to determine whether a patient is eligible for Medicaid assistance. These assets are considered "resources," which if they are determined to be "available" to the patient, are generally considered to be available for covering expenses prior to becoming eligible for Medicaid assistance.

Single individuals (i.e., unmarried, widowed, or divorced) are treated differently than married couples in the amount of assets (resources) they are able to keep and the amount of income they must pay to the nursing home as a "co-pay" or "patient pay" amount. With married couples, Medicaid rules recognize the need to keep the "at-home" or "healthy" spouse (known more formally as the "community spouse") from going completely broke. Single individuals, though, cannot qualify for Medicaid eligibility until their available resources fall below the individual countable resource allowance ($2,000 in most states).

In most states, assets can be "spent" or repositioned from countable assets to exempt assets to some extent. Certain assets are automatically non-countable-a homestead, a vehicle, personal property; term life insurance; cash-value life insurance (with a maximum face value of $1,500 to $10,000, depending on the state); and Medicaid annuities or Medicaid trusts.

Once the spend-down amount has been determined, the most efficient way to establish Medicaid eligibility is to "spend" or reposition assets from countable assets to non-countable assets. There are many ways to spend down the estate using the above exceptions. For most clients, the most important way is by using a Medicaid annuity.

Annuities have a highly favored status under Medicaid. A commercial annuity is an investment product sold by licensed insurance companies. The term "Medicaid annuity" was coined to apply to immediate annuities meeting the requirements of the Omnibus Budget Reconciliation Act of 1993 and the subsequent Health Care Financing Administration Transmittal No. 64.

Medicaid-friendly annuities are generally deferred annuities that have language written in the contract allowing the policy to be annuitized or converted by the issuing insurance company to an immediate Medicaid annuity at the request of the policyholder.

Not all annuities can be converted to Medicaid annuities, however. The annuity income stream must begin prior to applying for Medicaid. Many insurance companies don't structure their annuity payouts in compliance with the Medicaid annuity rules, and a payment period that's longer than the actuarial life expectancy may be considered a countable asset.

In addition, immediate Medicaid annuities must be irrevocable contracts. Once the annuity has been purchased, the owner does not have the right to revoke the contract and obtain a refund. In addition, it's generally advisable to waive rights to any "free-look" period where the policyholder, by law, would have a right to reject the contract.

There are three types of payouts that tend to qualify as non-countable under the Medicaid rules-level monthly payments, level annual payments, and "balloon" payments. Annual payments are used in states where the policyholder would not want to add the monthly payment to the monthly income of the patient or the spouse, thereby increasing the co-payment amount. Balloon payments are used effectively when the primary purpose of the annuity is to transfer a nursing home resident's wealth to heirs or beneficiaries at the end of his or her life. Many states have restricted the use of the balloon payments, however, since they're seen as depriving the state of resources that should be used as part of the co-payment.

Advisers can really demonstrate their value to clients when there is an immediate need for Medicaid planning. This happens when a patient is already in an LTC facility, or in a hospital and reasonably likely to be transferred to an LTC facility. Many advisers and clients don't realize that in most states, there are still many strategies to preserve assets even if a person has already been in a nursing facility for some time.

Consider the following example. If a Michigan nursing home patient has $52,000 in her bank account, already owns a prepaid funeral, and seeks advice on establishing Medicaid eligibility, she can keep $2,000 in resources, thus needing to annuitize $50,000. At her age, her life expectancy is five years; therefore the annuity can pay out about $850 per month; about $10,100 per year; or about $25 per month with one payment of $49,410 in month 60.

Depending on her circumstances and state laws, she may want to elect the annual payment, which would require her to pay full price for one month of care during the year that she has the excess income but allows her to use some of the money to purchase clothes or other necessities. Or she could choose to take the balloon payment and reduce the total amount that she pays to the nursing home.

The commercial annuity is the best tool for qualified assets such as IRAs, 401(k)s, 403(b)s, and the like. To liquidate these plans at once in order protect the assets would require the owner to incur the total tax liability associated with the full distribution of the qualified assets. However, these assets can be rolled over into a Medicaid annuity, and the payout structure can meet both the Medicaid rules and the required minimum distribution rules.

You must also be careful that your client's combined monthly income from the annuity along with other income, such as Social Security and pension payments, stays under the allowable limits in those states that have an income cap. Otherwise, buying too large an annuity income stream could inadvertently take clients even slightly over the limit and completely disqualify them from Medicaid.

Clients, for the most part, are unaware of the problems they will face when trying to get state or federal aid for nursing home care. By learning about Medicaid planning and the use of Medicaid annuities, financial advisers can demonstrate their value and also earn income through the sale of the annuities.