A House of Representatives bill entitled as the “Close Annuity Loopholes in Medicaid Act” has been proposed earlier this month to reduce the benefits of an asset preservation strategy for a commonly used benefit of the “well” spouse in Medicaid planning when the ill spouse seeks Medicaid benefits to help pay for cost of care in a nursing home, assisted living facility or at home. This does not mean all annuities will be adversely affected (see additional article in this month’s Texas Elder Law E-letter entitled “Am I Killing the Goose that laid the Golden Egg? How tax-deferred annuities can be used in Texas in Retirement Accounts so that the Government pays for care costs”).

It appears the bill is aimed at the planning technique of purchasing a single premium immediate annuity in the name of the well spouse (hereinafter referred to as the “community spouse”) so that an otherwise “countable resource” becomes exempt pursuant to the terms of the Social Security Act which indicates that certain single premium immediate annuities are exempt from counting as a resource since the annuity cannot be cashed or sold and is merely an income stream.

As an example of how this presently works, let’s say the husband is in a nursing home that costs $5,500 a month and his only income is Social Security which is $1,500 a month. If his wife also has Social Security of $1,500 per month and a pension or salary of $2,000 per month, then their income exceeds the limit (presently $302,250 per month) so that the most “countable” resources that the couple could have is $120,900 (this figure is generally adjusted annually). Thus, if the couple has $300,000 of countable resources, then the husband would not be eligible for Medicaid which would cost the couple an extra $4,000 a month ($5,500 for nursing home minus husband’s $1,500 of income since if there is Medicaid eligibility, then his share is generally his income) until the couple “spent down” their countable resources to $120,900. However, if the community spouse bought a single premium immediate annuity in the amount of $200,000 that complied with the present Medicaid rules, then there would only be $100,000 ($300,000 – $200,000) of countable resources (which is less than the maximum resource limit of $120,900) and there should be immediate Medicaid eligibility (assuming all other requirements are met) as of the first day of the next month, thus saving the extra $4,000 from having to be spent monthly on the cost of care. The rules permit the community spouse to keep all of her income. Thus, if the annuity paid her $5,000 a month, then under the present rules she could keep that $5,000 per month in addition to her Social Security ($1,500) pension or salary income ($2,000). So, in this example, the wife would have $100,000 of countable resources plus monthly income of $8,500 ($5,000 + $2,000 + $1,500) and only husband’s income ($1,500) would be paid to the nursing home as Medicaid would pay the cost of care over that amount. This would result in a $4,000 monthly savings ($5,500 – $1,500). However, if the new Congressional bill becomes law, then ½ of the annuity income (in our example, ½ of $5,000 = $2,500) would have to be paid to the nursing home in addition to his Social Security. So, if this bill passes, then the savings would only be $1,500 ($5,500 cost of nursing home – $1,500 husband’s Social Security – $2,500 representing ½ of wife’s annuity) instead of $4,000. This bill was proposed in a previous Congressional session, but it failed to pass. However, due to the recent election, passage is much more likely although this may be put on hold if Congress decides to do Medicaid block grants.

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