This week’s column is a continuation of our column from last week where we answered questions regarding tax-deferred annuities, the different types and the tax benefits and consequences of purchasing or owning one. Included in the questions posed last week was “what are the Medicaid implications for the owner of an annuity.” We address that issue separately because it can become quite complex. A tax-deferred annuity is essentially an insurance contract. An Annuity contract can either be “qualified” which means it was purchased with pre-tax dollars or “non-qualified” which means it was purchased with after tax dollars. In the Medicaid context it is important to distinguish these two annuities from one another as they are treated differently for eligibility purposes.

Qualified Annuities – Retirement Annuities

Qualified annuities, or as some people call them “retirement annuities” are an exempt asset for the purpose of qualifying for Medicaid so long as certain conditions are met. A Qualified annuity will not be counted as an asset for the purpose of determining Medicaid eligibility so long as the applicant has “maximized periodic payments.” What this means is that the applicant must be receiving a monthly periodic payment as calculated by the department of Social Services. The IRS mandates a Required Minimum Distribution on all retirement accounts for persons 70 ½ years of age. Typically, the Department of Social Services in Suffolk County using their own tables, requires that applicants take a distribution from their qualified accounts that exceeds the amount required by the IRS. Other counties rely on the IRS RMD tables, therefore the practice is not uniform throughout the state. In a situation where the monthly payment for the Annuity is fixed, and not able to be changed, proof of that will be sufficient and failure to maximize will not negatively affect the application for Medicaid.

Non-Qualified Annuities

Non-qualified annuities require special attention when an application for Medicaid is being processed. Recent changes in the Medicaid regulations require that where an applicant for Medicaid or the spouse of the applicant is the owner of a non-qualified annuity, the State be named as the remainder beneficiary in the first position for at least the amount of Medicaid paid on behalf of the institutionalized individual. Where the Medicaid applicant has a spouse or minor child in the community, the State need only be named in the second position, behind that spouse or minor child. In practice, one example of this requirement looks something like this: Husband is applying for Medicaid and owns a Non-qualified Annuity contract in the amount of $100,000.00. The annuitant (or in other words the person whose life is insured) is the wife. At the time of application, Husband transfers his interest in that annuity to his wife who is residing in the community. She is now the owner as well as the annuitant. As required, she names the State as beneficiary on the annuity. The Medicaid application is filed, and is in process when unexpectedly, eight months later, the wife passes away. In this case, the State, as the beneficiary on the annuity for an amount equal to benefits paid on behalf of the husband, will be reimbursed for benefits paid. Here, because the Husband was residing in the Nursing Home pending the approval of the application, the State likely paid out an amount equal to or close to the entire value of the contract. A better solution may have been to liquidate this contract and transfer the cash to the wife, avoiding the requirement that the State be named as beneficiary. Under current law, a transfer to the spouse is an exempt transfer. Although the death of the spouse will likely result in some amount of the assets being spent on care, there would have been greater opportunity to preserve assets had the annuity been liquidated. However, it is important to note that liquidating an annuity may have income tax consequences.

It is important to consult with a professional who can advise you as to the best course of action when applying for Medicaid.

Learn more about medicaid law here.

– Nancy Burner, Esq.