‘Medicaid Annuity’ Trouble

May 18, 2011

By Douglas I. Friedman

InsuranceNewsNet Magazine, May 2011
 

If a customer wants to qualify for Medicaid nursing home benefits, should the advisor propose the purchase of an immediate annuity?

To qualify for Medicaid nursing home benefits, the customer must meet low income and resource limits. So, the question here is whether the value of the immediate annuity is counted as a resource. If not, the purchase may decrease the customer’s resources enough to meet the resource limits for Medicaid nursing home benefits. In addition, the income from the annuity would have to be low enough so that the income limits are not exceeded. Finally, the transaction is intended to avoid the usual waiting period that may apply, such as for gifts to children or in trust.

Assuming that this is a valid technique (more on that below), to accomplish the desired results generally means impoverishing oneself. What to do in these situations is often anything but clear. Here’s why.

How Medicaid Works

Most people think that Medicaid works the same everywhere. This is not the case. Medicaid is a federal program, to be sure. But, it is a federal program administered by the individual states. To determine income and resources, there may be questions of state law involved. This means that the rules can be applied differently from state to state. What may be a solution in one state may cause a problem in another. In other words, there is no silver bullet that accomplishes the desired results everywhere.

How Can I Get in Trouble?


In some states, a customer indeed may be able to place assets into an immediate annuity for Medicaid nursing home purposes. In these states, the rules must be followed carefully. But, what if the state where the customer resides does not exclude immediate annuities for resource purposes? Or what if the transaction is not conducted properly? In that case, the agent could create the worst of all results. The customer not only can’t get Medicaid nursing home benefits, but also the customer can’t get to the money. Remember, immediate annuities usually do not have a cash surrender value.

Should assets be transferred to the children?

Sometimes we are asked if the Medicaid qualification problem can be solved by transferring assets to children, with the understanding that the children will spend the money for the parents’ care as needed. While an express arrangement like that would probably not qualify for Medicaid purposes anyway, this possibility also is fraught with problems. What if the children decide not to transfer the assets back? There is no way to force them to do so. What if a child goes bankrupt? The parents’ assets may be included in the bankruptcy. What if a child gets divorced? The parents’ assets could be included in a property settlement for the spouse. So, while we all assume that everything will work out and the assets will be available (with a wink and a nod) later for the parents if needed, the realities of life itself may override what we assume will happen.

 

Who Wants to Go to a Nursing Home?

Have you ever heard a customer say that the customer’s goal is to go into a nursing home? I don’t think so. More likely, you have heard customers say something along the line that they would rather cut off their foot than go into a nursing home. Or that they would do everything possible to prevent their spouse from having to go into a nursing home. So why the concern with impoverishing oneself to accomplish something that the customer most likely does not want to do in the first place?


The answer usually is that, indeed, it’s not the client who wants to impoverish himself. Rather, it is the customer’s children. The children are concerned that the customer’s assets will be spent down to provide end-of-life care and the children’s inheritance will be lost or greatly diminished.

If one just considers what is best for the parents, though, it usually is best for them to retain control of their assets and to utilize them as needed for themselves at the end of their lives. In that way, the parents can retain the most flexibility, which is essential to planning with limited resources.

So why would the parents agree to a transaction like this? It’s because the parents are often relying on the children to take care of them as they grow old. So the parents don’t want to say anything that they think might upset their children.

I learned this early in my career. A child came in with his father to seek my advice about Medicaid planning. The father had some assets and income, and the son spoke for about 20 minutes about what was to be done with them so they would not count as Medicaid income or resources. The father remained silent the whole time. When the son was finished, I asked him if I could talk to the father alone for a few minutes. The son said, “Sure, my father understands and agrees with all we have discussed.” At which point, the son left the room and I turned to the father and said, “You have not said a word yet. Do you want to transfer all of these assets to your son?” The father responded with two words that I have never forgotten: “Hell no!” was the response.

We spoke for a few more minutes. Then I called the son back into the room and explained that I did not think the transfer of assets from the father was the best thing for the father, based on my conversation with him. The son was not pleased. They left and I never heard from them again. Presumably, the son found a lawyer who was willing to help accomplish the result that the son wanted and the father went along with it. I will never know.

 


In a different case, I remember sitting with a husband at his home, with his wife nearby in a wheelchair. He said that he would spend his last penny on care for her at home before he let her go to a nursing home.

These are compelling examples that illustrate the inherent difficulties in these cases.

What to Do in This Situation

The first question the advisor should ask is “Who is my customer?” If the parent would rather cut off a foot than go into a nursing home, then it would appear that the children are the customer, not the parent. Make your choice clear and put it in writing.

Next, insist that your customer engage the services of a qualified attorney for Medicaid planning advice. Neither the advisor nor an insurer may give a customer legal advice.

The lawyer may be someone that the advisor likes to work with and who can become a center of influence and source of referrals.

 

Conclusion

Again, there are certainly situations where Medicaid planning makes sense. But try to identify situations where impoverishing the parents may not make sense for them. Let the attorney advise on what, if anything, should be done. Then, if the customer purchases an annuity, the lawyer will have recommended it. It may not keep you from being sued (nothing can), but it may certainly help you in avoiding possible liability.

Douglas I. Friedman serves life and health insurers as a trusted resource on marketing practices, regulatory compliance requirements, and the development and introduction of new insurance products. His firm acts as national counsel for estate and business planning for leading insurers across the country.
 
© Entire contents copyright 2011 by InsuranceNewsNet.com, Inc.  All rights reserved.  No part of this article may be reprinted without the expressed written consent from InsuranceNewsNet.com.

 


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