Salvatore M. Di Costanzo

Annuities, which are contracts between you and insurance companies, are used to accomplish various objectives such as replacing a pension or generating a fixed-income stream. However, without proper planning, annuities can be a trap for the unwary seeking nursing home Medicaid. If you are averse to risk, an annuity product might be an attractive alternative to the stock market. 

For 2018, an applicant cannot have more than $15,150 in assets to qualify for Medicaid. Generally, any transfer of assets for less than fair market value made during the five-year period preceding nursing home admission (the “look-back period”) will render the applicant ineligible for nursing home Medicaid for a period of time based on the value of the assets transferred (the “penalty period”). Assets transferred to a spouse are not subject to a look-back period. It is important to note that the look-back period is applicable only to nursing home Medicaid and not for
in-home Medicaid.

There are essentially two types of annuity contracts for Medicaid purposes: qualified and nonqualified. A qualified annuity is funded with pre-tax dollars that meet certain qualifications under the Internal Revenue Code and are usually part of employer plans, such as a 403(b) or individual retirement account.  

The Internal Revenue Code requires an owner of a qualified annuity to take required minimum distributions (RMD) when the owner reaches age 70½. If the owner is taking the RMD, Medicaid will treat the principal of the qualified plan as an unavailable asset for eligibility purposes. However, the RMD must be turned over to the nursing home. If the applicant has yet to reach age 70½, Medicaid will require the applicant to take withdrawals using his or her own life expectancy tables.

A nonqualified annuity is funded with after-tax dollars where the applicant writes a check to an insurance company in exchange for a contract. Nonqualified annuities are not exempt assets for Medicaid eligibility purposes. Because a nonqualified annuity is treated as an available asset for Medicaid purposes, planning typically can be done to create Medicaid eligibility.

In all instances where there is a well spouse, an applicant should consider assigning the ownership of a nonqualified annuity to that spouse, since the transfer penalty rules do not apply. There are no income tax consequences either.  

If there is no spouse and the applicant is seeking community Medicaid, he or she might consider assigning the annuity to a Medicaid Trust that allows the grantor/creator of the trust to retain the benefit of the annuity income payments while commencing the five-year look-back period for nursing home care purposes. 

When an applicant with no spouse owns a nonqualified annuity and seeks Medicaid for nursing home care, matters can become complicated. Medicaid laws were changed in 2006 to require New York state to be named as a primary beneficiary of a nonqualified annuity bought after Feb. 8, 2006, unless the applicant has a spouse and/or a minor or disabled child, in which case, the state must be named as a contingent beneficiary. The state is only a beneficiary up to the amount paid on behalf of the applicant. If the applicant fails to adhere to this rule, the purchase of an annuity within five years of seeking nursing home Medicaid will be treated as a transfer of assets creating a period of ineligibility for nursing home Medicaid. 

For annuities bought prior to the new law, transactions such as adding or withdrawing money from the annuity, elections to annuitize the annuity or similar transactions cause the new law to apply. It is unclear how broad of an interpretation will be given to “similar transactions.” It is possible that a change of beneficiary can thrust you into this category.  

Clients are often told to annuitize their annuities. If a person does this, they are irrevocably transferring the cash value in the contract to the insurance company in exchange for a guaranteed stream of income. If an annuity is annuitized, the above annuity rules apply. Moreover, Medicaid will likely require the applicant to turn over the monthly payment to the nursing home.    

Because the rules for annuities can be burdensome, sometimes, the best planning technique might be to surrender the annuity and use the proceeds to implement other Medicaid eligibility planning techniques. Remember, however, when surrendering or transferring an annuity, there could be penalties and/or taxes whose costs usually outweigh naming New York state as a beneficiary.

Salvatore M. Di Costanzo is a partner with the firm of Maker, Fragale & Di Costanzo LLP in Rye and Yorktown Heights. Di Costanzo can be reached at 914-925-1010 /

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Salvatore M. Di Costanzo: The interplay between annuities and Medicaid planning