What Makes an Annuity Medicaid Compliant – Part 3

In last week’s post, I explained how a Medicaid compliant annuity (MCA)works in a married couple situation.  This week we’ll see how it can be helpful in the case of a single Medicaid applicant.

An MCA can be useful in preserving some assets when there is no chance of waiting out a 5 year look back period because the individual needs care now.  It can also cover the cost of care during the time frame of an expected Medicaid penalty for transfers that were made several years before a Medicaid application was even a thought in anyone’s mind.

Remembering that the MCA converts assets to income, here’s how it works.  Let’s say that Jane resides in a nursing facility and has $200,000 of assets which exceed the asset limitation of $2000 for Medicaid eligibility.  If Jane transfers some of those assets out of her name – for example, to a Medicaid qualifying trust – that transfer will create a Medicaid penalty which starts when Jane applies for Medicaid and meets all the requirements to qualify, but for the amount that was transferred.  

The problem is that she can’t meet those requirements and get the penalty started without spending down the remaining amount of the $200,000 that she didn’t transfer out of her name.  That’s where the MCA comes into play.  If Jane takes the remaining amount of money and purchases an MCA at the same time as she transfers the lump sum out of her name, she can then qualify for Medicaid.

If done correctly, the annuity along with her other income covers the private pay cost of care in the nursing home for the time frame of the penalty which results from the amount she transferred.  Choosing the right amount is key.  In order to be eligible for Medicaid, the monthly amounts generated by the annuity plus her other income from Social Security, pension etc. must not exceed the private pay cost.  Otherwise the penalty won’t start.

As you can see, this strategy can help cover the cost of care during the time frame of penalties that are expected for previous transfers made which can no longer be cured.  For example, Jane may have gifted money to a child to help with a down payment on a home.  If the child cannot give that money back, she will have a penalty as long as the transfer was within the past 5 years.  Adding that amount to the calculations, an MCA can insure that Jane will have the funds to be able to cover the private pay cost at the facility during the penalty.

There a lot of moving parts and there isn’t a “one size fits all” solution.  Choosing the optimum amount is critical because if done incorrectly the strategy will fail and since the MCA is noncancellable you can’t simply “do it over”.  That’s why it is important to work with someone who is very knowledgeable about Medicaid and Medicaid compliant annuities who can guide you to a successful outcome.