Purchasing an Annuity: A Strategy for the Healthy Spouse, While the Other Is in a Nursing Home

Long-term nursing home care is needed by about 1.4 million Americans every year, according to the Center for Medicare and Medicaid Services (2015). It is expensive, and so is long-term care insurance. Government programs, such as Medicare, will not cover the cost of nursing home care.

Note: Social Security benefits pay only an average of $15,144 per year. The 2017 Genworth Cost of Care Survey says annual nursing home care in Massachusetts, for example, costs $149,652 for private and $140,520 for semi-private.

Thus, if you are in need of care, you are left with two options, or a combination of both: 1) Apply for Medicaid, or MassHealth, as it is called in Massachusetts, or 2) Use your own resources. However, using your resources causes a significant drain on the finances of the family, particularly for the spouse who is not in need of nursing home care, often termed, “the community spouse.”

Most of the time, a community spouse can avail him or herself of a financial strategy in the form of an annuity, a financial product designed to accept and grow funds from an individual and distributed in a stream of payments at a later point in time, such as during retirement.

In order to be Medicaid eligible, while allowing the community spouse to remain financially stable, resources should be properly allocated between spouses. In addition, in most states, such as Massachusetts, a community spouse’s income has no effect on the other spouse’s eligibility for Medicaid (42 U.S.C. section 1396r-5(b)(1)). The community spouse can keep a portion of the couple’s assets, termed the community spouse resource allowance (CSRA). Anything in excess of the CSRA must be spent down on the nursing home spouse’s care or on legitimate expenditures, such as prepaid funerals and deferred maintenance on a home, for example, unless a financial strategy presents itself.

Using the assets in excess of the CSRA, the community spouse may purchase an annuity (or more than one), payable to the community spouse. However, this will not work with just any type of annuity. At this time, a nursing home spouse can transfer unlimited amounts to the community spouse, if it is for his/her sole benefit, and still allow the nursing home spouse to be eligible for Medicaid. Again, assets in excess of the CSRA, after the transfer, can be applied to an annuity.

Another way to look at it is this: If the couple needs to spend down assets to qualify to Medicaid, buying an annuity is a way to accomplish that. Timing is vital, though. The 2013 case Hughes v. McCarthy (6th Cir., No. 12-3765, (2013)) illustrates this point. In Hughes, the “primary issue [was] …whether the transfer of a community resource to purchase an annuity for the community spouse’s sole benefit… can be deemed an improper transfer …[even though the law allows a transfer] for the sole benefit of the individual’s spouse.” (See 42 U.S.C. section 1396r- 5(f)(1), even though section 1396p(c)(2)(B)(i) allows a transfer of assets.)

The appeals court held that, “When assets are transferred to the individual’s spouse or to another for the sole benefit of the individual’s spouse, before [emphasis added] the institutionalized spouse is determined eligible for Medicaid coverage, the unlimited transfer [to the spouse provision] controls….” Score one for the Medicaid applicant.

Therefore, purchasing an annuity can provide a community spouse with additional income that will not affect the other spouse’s eligibility for Medicaid benefits. Inter-spousal transfers, including resources used to purchase certain annuities, are proper if transferred before eligibility.

Remember that the annuity must be:

• For the sole benefit of the community spouse.
• Irrevocable and non-assignable.
• Actuarially sound (as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration).
• Of the type that provides payments in equal amounts during the term of the annuity with no deferral and no balloon payments made.
• Purchased prior to applying for Medicaid benefits.

An unmarried Medicaid applicant can also purchase an annuity with excess assets, provided it meets similar criteria and names the state Medicaid program as the first beneficiary. This strategy has the effect of slowing the drain of the remaining assets when the annuity pays out less than the cost of the nursing home paid privately.

Click here to read a case study about a couple qualifying for Medicaid for long-term care.