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
What Makes an Annuity Medicaid Compliant? (Part 2)
In last week’s post I explained what makes an annuity a Medicaid compliant annuity (MCA). This week I’ll explain how MCAs are helpful in qualifying for Medicaid. If you are a frequent reader of this blog you know that Medicaid is a needs based benefit with an asset limitation and also income restrictions. What makes the MCA work is that it converts an asset to income. A Medicaid applicant can have no more than $2000 in countable assets to his/her name. In the case of a married couple the combined countable assets of both spouses is totaled and then divided in half. The healthy spouse can keep one half of the assets but only up to a maximum, which currently is $130,260. Income on the other hand is treated under what is called the “name on the check” rule. The healthy spouse’s income is not considered in determining Medicaid eligibility for the ill spouse. It doesn’t matter how much income the healthy spouse has. That’s why the MCA works. It converts the excess countable assets that are over the asset limit to income for the healthy spouse. The key though is that the annuity can’t be converted back to a lump sum. Otherwise it will still be counted as an asset. That’s why it
What Makes an Annuity Medicaid Compliant?
We have recently received a number of calls inquiring about Medicaid compliant annuities. Similar to QITs which I wrote about here a couple of months ago, there is much misunderstanding of what is and is not a Medicaid compliant annuity (MCA) and when it can be used. First, let’s clearly define an MCA. An annuity must be a single premium immediate annuity to be considered Medicaid compliant. This means that the annuity is purchased with a single lump sum, known as the premium. Annuities are insurance contracts in which the premium is given to the insurance company in return for an agreement in which the company pays the insured back his or her money over time with interest. An immediate annuity begins the payments immediately within 30 days as opposed to a deferred annuity which does not start the payments until some future date. So, is that it? Not quite. The annuity must also be noncancellable and non assignable. Once purchased you are locked into a monthly payment schedule. You can’t cancel the contract and get your remaining premium back in a lump sum and you can’t sell it to a third party for a lump sum. In other words, you can’t change your mind after making the purchase. The payments under the
Biden Tax Plan Begins to Take Shape – Part 2
In my post last week, I reviewed what we know so far about President Biden’s proposed tax law changes. One change would increase the tax rate on capital gains, which currently is taxed at a lower rate than regular income. Another change relates to the provision that wipes out the capital gains tax for assets that are passed at death. This provision is what is known as the “step up in basis”. It has saved many Americans who have inherited assets, hundreds of thousands of dollars or more. Here’s how it works. Normally, if I buy a stock for $1 and sell it for $10, I must pay tax on the $9 of gain. If I hold the stock, however, till I die and my children inherit it, the basis becomes what it was worth when I died. This allows my heirs to avoid tax on the gains during my lifetime. In my example, I would only owe tax on any gain above $10. President Biden plans to restrict but not entirely eliminate the step up in basis. The first $1,000,000 of capital gains would be eligible for the step up in basis, thus exempting the tax on gain up to that limit. A married couple would be able to each exclude $1,000,000. Additionally, if
Biden Tax Plan Begins to Take Shape – Part 1
President Biden in his speech to Congress last week gave us some details on the tax bill he will attempt to get passed. While it’s very early in the process, and what ultimately becomes law often varies greatly thru the back and forth negotiation process in Congress, let’s take a look at how some of these changes might or might not affect our clients. Biden talked about raising the capital gains tax rate. Currently, capital gains is taxed at a lower rate than regular income. Right now top rate for capital gains is 20% vs. 37% for regular income. The President proposes to raise the top rate back to 39.6%, which is what it was before the last tax law changes in 2017. Capital gains would then be taxed at the same rate as other income, however, this would only apply to individuals with income of $1,000,000 or more. This change would only affect the very wealthy. Additionally, most retirees drop to a lower tax bracket once they retire, drawing their income mostly from Social Security, pension and interest and dividends. The income threshold of $1,000,000 is certainly high enough that if you are reader of this blog, it is very likely that this provision wouldn’t affect you or your
Don’t Forget About the Elective Share – Part 2
Last week I wrote about Jim’s call to our office. His dad died leaving everything to Jim, including the task of taking care of his mom who had been living at home needing nursing home level care. Jim had found a nursing facility who would take her in. It would cost him $100,000 in care after which he would apply for Medicaid. That was his plan - or so he thought. I explained to him that he would have to pay more than that because of something called the elective share, which provides protection for a surviving spouse who is left nothing by his or her deceased spouse. In New Jersey, the value of the elective share is 1/3 of the deceased spouse’s estate less what the surviving spouse already has. The reason this is relevant is because when Jim files the Medicaid application, the State will treat any failure to assert a legal right to the elective share by his mom as if she gave that money away - what Medicaid considers a transfer for less than fair value. It would then assess a Medicaid penalty or waiting period for benefits. I told Jim that we needed to determine if the elective share is greater than the $100,000