Medicaid Annuities: “Friendly” versus “Compliant” Do you Know the Difference?

Somehow over the years the terms Medicaid Friendly Annuity and Medicaid Compliant Annuity have entered the planning lexicon.  Most advisors without much background in this work use them interchangeably – but they really have different meanings.  If you are not aware of the difference or why you should never use the term Medicaid Friendly Annuity, I encourage you to read on.

Annuities have been used as a valuable planning tool to help many families convert excess resources into an income stream and qualify for long-term care Medicaid benefits.  The original doctrine on annuities came down in the form of HCFA Transmittal 64.  These rules were in conjunction with the implementation of a 3-year look back period contained in OBRA 93.  It laid down a set of things an annuity stream must include in order to not be considered a transfer for less than fair-market value – which would cause a transfer penalty.

Originally the annuity had to be a single premium immediate annuity (SPIA) that was actuarially sound and made all payments within the life expectancy of the owner as based on the Social Security Life Expectancy Table.  Any payments that exceed that term were considered transferred for less than fair-market value.  The annuity also need be irrevocable and not be able to be sold or liquidated (i.e., non-commutable and non-assignable).  The accumulation of these rules became the foundation for what became known as the Medicaid Compliant Annuity.

In 2006, the DRA added extra requirements that included level, equal payments and naming the state as a primary or secondary beneficiary depending on the owner’s circumstances.  The level payment requirement was coupled with an all-out declaration that balloon-style annuities would automatically create a transfer penalty if purchased.  This severely limited the use of balloon-style annuities that had previously been quite effective for single patients, but allowed for the continued use of level annuities in cases where converting excess assets into an income for the healthy spouse makes sense.

The SPIA that is designed to comply with all of these rules is what is now commonly known as the Medicaid Compliant Annuity.   It is not your garden variety annuity and rarely does anyone by these annuities for general estate or retirement planning.  It is a specific tool to use in a very specific case and quite often the design of the annuity is so specific and personal to the patient’s circumstances that trying to do it before there’s a care crisis is impossible. That’s especially true since you have to designate the state as a limited beneficiary to repay the state for care provide to the infirmed spouse.  Anyone foolishly trying to use the Medicaid Compliant SPIA before there is a care crisis or a defined patient would have to have clairvoyance that no Medicaid Planner possesses.

But that still doesn’t stop some unscrupulous advisors from touting annuities as the cure-all for long-term care protection.

That brings us to the term Medicaid Friendly Annuity.  Let me start out by saying that there is no such thing as a Medicaid Friendly Annuity.  A SPIA is both specific and compliant or it’s not.  The term Medicaid Friendly Annuity has been used and misused by as a term of hyperbole by overzealous annuity salespersons or in some cases as an attempt to defraud the retiree into buying and inappropriate annuity.  It has been used to describe any annuity that’s used for estate planning purposes that can later be annuitized – even though that’s only one of the elements that would make it compliant.

What they don’t tell you is that most companies will convert the deferred annuity into an income stream, but won’t satisfy all of the other requirements to make it Medicaid Compliant.

There are more problems with using that term than it’s worth since it’s misleading to the annuity purchaser:

First, deferred annuities are countable assets under Medicaid.  Just because a deferred annuity can be annuitized does not automatically make it compliant with the Medicaid rules.  Most companies will not convert their deferred annuities into a Medicaid Compliant Annuity and those that do will often charge the same surrender fee that would be paid if the deferred annuity would be cashed out and sent to another company that has a Medicaid Compliant Annuity.

Second, misrepresenting a deferred annuity’s ability to be protected from the Medicaid spend down is nothing short of economic exploitation of the elderly. If someone sells a deferred annuity on the basis that it will somehow later be able to be protected from the Medicaid spend down, it is disingenuous and possibly unethical.  And yet I still see case after case where a person owns an annuity thinking it’s protected from the Medicaid spend down because the annuity agent said it was Medicaid Friendly.

A case in point.

Recently an advisor from Florida called me and said he had a client in the nursing home.  Two years ago the patient’s financial advisor put almost all of her liquid assets in a deferred annuity he told her was “Medicaid Friendly.”  When she purchased it, she was led to believe that the money in the deferred annuity was protected from the Medicaid spend down.

The family was irate to see that this fast-talking salesman had misled their mother and now not only were the assets not protected from the Medicaid spend down, but to move them and do something with them that could protect some or all of them they would incur about $20,000 in surrender charges.  No annuity would solve this lady’s Medicaid spend down problems and the false hope that the deferred annuity had solved the problem kept them from pursing viable asset protection plans.

To those who sell annuities: Unless you are using a Medicaid Compliant SPIA in a specific instance to solve a specific Medicaid spend down problem, I highly advise you to not use Medicaid or the term “Medicaid Friendly Annuity” in the sales of your deferred annuities unless it’s part of a specific Medicaid Asset Protection Plan.

To those who have bought a deferred annuity: If your annuity salesperson sold it to you on the basis of it being Medicaid Compliant or Medicaid Friendly, I highly recommend you have the transaction reviewed by a Certified Medicaid Planner™ to determine if the annuity is appropriate or if further planning is necessary.

Medicaid Compliant Annuities are still a viable way to solve many Medicaid spend down problems.  When used properly, they can be a godsend to the community spouse when a health crisis threatens financial ruin.  If you need help understanding the proper role, function and structure of a Medicaid Compliant Annuity, look no further.

Our team provides help and assistance to advisors and consumers on the proper strategies and methods for achieving Medicaid eligibility and properly structuring assets in compliance with the Medicaid spend down and asset transfer laws.

If you would like a no-cost, no-obligation review of your existing policy or need assistance with protecting assets from the Medicaid spend-down, please fill out the form below: