Using Medicaid Compliant Annuities to Preserve Assets in Long-Term Care Planning

For many aging clients, long-term care costs pose a significant threat to their financial security. Without proper planning, years of accumulated savings can be quickly depleted to cover nursing home expenses. Fortunately, Medicaid Compliant Annuities offer a powerful strategy for attorneys assisting clients with Medicaid planning. By converting excess assets into an income stream, MCAs help clients achieve Medicaid eligibility while preserving what they have left for a spouse or heirs.

What Is a Medicaid Compliant Annuity?

A Medicaid Compliant Annuity (MCA) is a single-premium immediate annuity structured to meet strict Medicaid requirements. These annuities convert excess countable assets into an income stream, allowing clients to qualify for Medicaid while preserving some or all of what they have left.

To be Medicaid-compliant, the annuity must:

• Be irrevocable – The payment amount, term, and parties of the annuity contract cannot be altered.
• Be non-assignable – The contract cannot be assigned to another party or sold on the secondary market.
• Be actuarially sound – The term of the annuity must be fixed and equal to or shorter than the owner’s Medicaid life expectancy.
• Provide equal payments – The annuity must provide equal monthly payments with no deferral or balloon payments.
• Name the state as a beneficiary – In most cases, the state Medicaid agency must be named primary beneficiary for benefits paid on behalf of the institutionalized person.

How MCAs Preserve Assets in Medicaid Planning

1. Protecting a Healthy Spouse’s Financial Security
When one spouse requires nursing home care, Medicaid’s asset limitations can put the community spouse’s finances at risk. Instead of depleting their assets on care costs, married couples can convert their excess assets into an MCA payable to the community spouse, ensuring they maintain financial stability while the institutionalized spouse qualifies for Medicaid.

Example:

• A couple has $350,000 in countable assets, exceeding Medicaid’s asset limit.
• The community spouse purchases a $200,000 MCA payable over five years.
• The institutionalized spouse qualifies for Medicaid immediately, while the community spouse receives a steady income from the annuity.

2. Avoiding a Medicaid Penalty Period
Unlike gifting or trust transfers, which trigger a penalty period of Medicaid ineligibility, purchasing an MCA is not considered a divestment. This makes it a valuable tool for crisis planning, allowing clients to preserve what they have left even at the last minute before applying for Medicaid.

3. Converting Assets into an Income Stream
Since Medicaid doesn’t impose limitations on the community spouse’s income, the MCA payments to the community spouse will be protected. This allows the couple to preserve assets while ensuring the healthy spouse can maintain their lifestyle in the community.

Single applicants, on the other hand, can use Medicaid’s divestment rules to their advantage by making a gift to a loved one and intentionally triggering a penalty period. Then, they can use the income stream from the MCA to cover care costs during the penalty period. This strategy ensures they receive value from their assets rather than spending them down unnecessarily.

4. Protecting Family Legacy & Heirs
While MCAs require the state Medicaid agency to be named the primary beneficiary in most cases, they still allow for asset preservation when structured properly. For instance, an MCA owned by the community spouse can be structured over a shorter term to increase the likelihood they outlive the term. Additionally, exceptions exist where the MCA owner can name their own primary beneficiary ahead of the state Medicaid agency, including:

• An MCA owned by an institutionalized spouse – may name the community spouse as the primary beneficiary
• An MCA owned by any person with a minor or disabled child – may name the child as the primary beneficiary

Read More: Estate Recovery: A Critical Aspect of Medicaid Planning

Why Elder Law & Estate Planning Attorneys Should Leverage MCAs

MCAs provide a legal and effective way to protect client assets while ensuring Medicaid eligibility. For clients in crisis situations, these annuities offer attorneys a strategic tool to help them retain financial security and provide for their loved ones.

If you’re an estate planning or elder law attorney, mastering Medicaid Compliant Annuities can set you apart and provide immense value to your clients. Schedule a call with us today to learn more about how MCAs can fit into your practice and how we can support your firm with expert guidance.