Private Annuities Can Aid Medicaid Eligibility: Planning Today for Later Years

By Laffie, Lesli S. | Journal of Accountancy, July 2004 | Go to article overview

Private Annuities Can Aid Medicaid Eligibility: Planning Today for Later Years


Laffie, Lesli S., Journal of Accountancy


Clients sometimes ask CPAs how they can qualify for Medicaid. With monthly nursing home costs between $5,000 and $7,500, for many older adults Medicaid is the only way to pay for long-term care.

Each state sets income and asset limits to qualify for Medicaid; such limits may require many people to "self-impoverish," that is, to reduce their asset and income levels in order to qualify. Often, this entails giving property away to children, grandchildren or others. However, because Medicaid requires full disclosure of certain recent gifts, and because other problems can occur (for example, gift tax), many clients may be better off creating a private annuity to shed excess wealth.

WHAT IS AN ANNUITY?

An annuity is a contractual arrangement under which a taxpayer gives money to a third party, who agrees to a schedule to pay the money back. Annuities can be fixed or variable in return, and immediate or deferred in payment.

Private annuities are a powerful tool in Medicaid planning. A parent can purchase an annuity contract from his or her child. The child receives the parent's money in exchange for a written, contractual promise to pay a stated monthly benefit. When the owner/annuitant dies, the remaining money rests with the contract issuer (usually, the child)--which is exactly what the taxpayer wanted.

STATE REQUIREMENTS

CPAs need to exercise care when structuring private annuities to make clients Medicaid-eligible; to avoid having the annuity balance count as an available asset for Medicaid purposes, they may have to meet state law requirements, such as the following:

* The annuity must he actuarially sound. It cannot guarantee payments for more than the annuitant's expected life. …

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Private Annuities Can Aid Medicaid Eligibility: Planning Today for Later Years
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