25 Mar 4 Ways To Use Annuities For Asset Preservation In Government Assisted Care Costs In Texas
Long-term care Medicaid (the government program that assists in payment of nursing home care and medication) is means-tested. The government looks at an applicant’s assets prior to obtaining eligibility for paying for long-term care. The government (Texas Health and Human Services Commission) also considers income (there is an income cap which is presently $2829 per month) and whether the applicant made any uncompensated transfers within 5 years prior to the date of the application. There are numerous strategies to obtain governmental assistance since the cost of care is so great (the average monthly cost of a nursing home in Texas is approximately $7500). Many risk impoverishment without using the government rules to their advantage (just like many use tax laws to pay less taxes).
There are at least 4 ways to use different types of annuities in getting government assistance as follows:
- Income and assets of married couple are too great –
If the gross non-countable resource income (typically Social Security, pension or required minimum distributions from a traditional IRA) is close to or greater than $3853.50 per month, then a Medicaid compliant annuity is often used to change countable resources into an income stream. The most common situation when this is used is when the community spouse (the spouse who is not in a nursing home) has income that is close to or exceeds the $3853.50 allowance (there is a different allowance for the Medicaid program when both spouses are at home and one needs care). The annuity would be bought in the name of the community spouse. The rationale for the annuity to not count as a resource is that it becomes an income stream that cannot be cashed or transferred. If the annuity has not been fully paid within the life expectancy of the annuitant, the state could be beneficiary to the extent that benefits were advanced. So, the health and age of the community spouse should be considered when determining the length of the annuity.
- Converting assets in ROTH IRA into any type of annuity within the ROTH –
In Texas, only traditional IRAs with a required minimum distribution (RMD) are a non-countable resource (although the RMD is considered as income). The age when RMDs are required depends on the year you are born. At this time, some started taking RMDs at 70 ½, some at 72 and some at 73. Since there are no required RMDs for a ROTH as the taxes were paid upfront, Texas permits the purchase of an annuity within the ROTH for it to not count as a resource. So, whether the applicant is single or married, countable resources can be converted to a non-countable resource by simply purchasing any type of annuity within the ROTH. However, timing is crucial – especially for a married couple since the government looks at the countable resources at the time of institutionalization.
- Converting retirement accounts with RMDs that are not a traditional IRA into a traditional IRA –
Under present Texas rules, only traditional IRAs with RMDs are not countable. Thus, if you have a 401K and you are receiving RMDs, it still counts as a resource. Thus, by simply converting the 401K into a traditional IRA changes the nature of the resource from being counted to being non-countable. Again, timing of conversion could be crucial in maximum asset preservation.
- If single, using gifting along with a Medicaid compliant annuity –
The countable resource limit for a single person who is applying for long-term care Medicaid is only $2000. Certain resources (i.e., homestead, 1 car, personal property items, term life insurance, traditional IRA with RMDs, etc.) do not count. So, whether you have a checking account, savings account, investment account, etc., there is often a desire to get down to the resource limit to get governmental assistance without just spending all on the cost of care. As a result, some (besides converting countable resources into non-countable resources) do a calculation where a Medicaid compliant annuity is purchased which pays the difference between the applicant’s income and the cost of care with the Medicaid compliant annuity expiring at the same time as a transfer penalty for the applicant making a gift. This is done by a mathematical formula using the applicant’s income, the monthly cost of the facility and the amount of countable resources while using Medicaid’s transfer penalty divisor. The transfer penalty for making a gift within Medicaid 5-year lookback period starts from the first day of the month when the applicant is below the $2000 resource limit and when the applicant applies and is otherwise eligible for benefits. As a result of the annuity purchased in the applicant’s name, the applicant’s income will be increased to be above the income cap. A qualified income trust will need to be created. It is usually recommended that a potential applicant (someone who fails to have adequate long-term care insurance, income or assets to pay for care), have additional powers included in the potential applicant’s general durable power of attorney (to permit the agent to create a qualified income trust and the agent to make gifts). The standard statutory power of attorney that most have is inadequate.
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