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Annuity Medicaid Planning Examples

Annuity Medicaid Planning Examples
Medicaid Planning
Jason Neufeld
March 11, 2017

Medicaid Annuity Planning - Single Person

Let’s say an 81 year old single woman has $200,000 in excess resources. Has a $1,500 income, but the nursing home private pay rate is $8,500. If you take $200,000 and divide it by $7,000 (the difference between her income and the private-pay rate), we know that in about 28.5 months, without any Medicaid planning, her assets will be completely depleted. Her life-expectancy table, the same life-expectancy table we would use when utilizing a personal-services contract, says she will live another 8.86 years. Yet her money will only last 2.3 years at the private-pay rate!

Medicaid Compliant Annuity Plan

Partial gift to intended heirs. This intentionally creates a Medicaid penalty period per the 5-year lookback rules. But a Medicaid-compliant annuity is purchased to pay the nursing home through the penalty period. The process is calculated so that after the annuity ends at the same time as the penalty period of ineligibility. The month after, the nursing home resident is Medicaid eligible. This is also sometimes referred to as the reverse half-a-loaf or half-a-loaf medicaid planning technique.

To plan appropriately:

STEP 1. Determine the amount to gift: Take the income shortfall ($7,000 in our example) and add it to the penalty divisor. Lets assume the penalty divisor is $8,000 for easy math). This gives us a $15,000 “burn rate.”

STEP 2. Take the spend-down amount ($200,000) and divide it by the burn rate ($15,000). The result gives us the term of the plan: 13.33, which we will round up to 14 months.

STEP 3. If you then take the term of the plan (14) and multiple by the penalty divisor ($8,000) you get the amount that can be gifted ($112,000). So a gift of $112,000 can be given to the Medicaid recipient’s eventual heirs or (to avoid the money being subject to the beneficiary’s creditors, bankruptcy, divorce, etc..) to an irrevocable trust.

STEP 4. Determine the amount to put into the Medicaid-compliant annuity: Take the spend-down amount and subtract it from the Gift Amount. So, in our example: $200,000 – $112,000 = $88,000. Put 88K into a DRA Medicaid Compliant Annuity.

STEP 5. The annuity amount is structured into a 14 month time period. Remember the purpose of the annuity is to help is privately pay the nursing home through the Medicaid penalty period. This factors in a slight shortfall, which will be paid out of the near $2,000 allowed in the Medicaid applicant’s savings account.

This all happens in the same month (make gift, purchase the annuity and apply for Medicaid). Getting the Medicaid penalty period started in the same month is important to the plan’s success and wont happen until the Medicaid applicant would be receiving skilled nursing care and otherwise eligible for Medicaid.

Medicaid Annuity Planning for a Married Couple

Remember that a community spouse can keep $120,900 out of the couple’s joint assets in Florida (as of January, 2017). Let’s say we have Mr. and Mrs. Smith.

Mr. Smith entered the skilled nursing facility on January 1, 2017, he is 85 years old. He has $2,500 in monthly income. Mr. Smith’s nursing home has an $8,500 private-pay rate.

Mrs. Smith is healthy and still lives in their home. She is 83 years old and has $1,100 in monthly income.

Together they own a home, one care and $300,000 in savings and in their stock portfolio.

We know that, without Medicaid planning, Mr. and Mrs. Smith will exhaust their life savings in a little over 35 months. When Mr. Smith passes away, his wife only be left with a low income (it will actually be $2,500 because the Social Security Administration allows the surviving spouse to choose the higher of the two spouse’s social security income).

We know that Mrs. Smith is allowed to keep $120,900 of the $300,000 in assets. Medicaid also allows Mr. Smith to keep $2,000. So the medicaid plan will need to spend down $177,100. In other words, the couple has $177,100 in excess resources.

Let’s assume that there is nothing else the couple wants or needs that would apply to the spenddown - i.e. we need to shelter the full $171,100.  

We know that Mrs. Smith’s life expectancy, per Medicaid life-expectancy tables is: 7.77 years. So, we would obtain a Medicaid-compliant annuity contract for seven years.

Mrs. Smith has $1,100 in income. But, in Florida, she has a minimum monthly maintenance needs allowance (MMMNA) of $2,003.00 (as of 2017), allowing us to shift $903 from Mr. Smith’s income ($2003 - 1100).

Mr. Smith would then only be entitled to $1,597.00 per month ($2,500 - 903). Less his $105.00 personal needs allowance means he would have to pay the nursing home: $1,492.00 as his “medicaid co-pay.”

So, using this strategy, instead of the Smiths paying $8,500 a month until losing the totality of their assets, they are only paying $1,492.00 per month.

Medicaid Attorney Resources

What is a Medicaid Compliant Annuity?

Jason Neufeld

Jason Neufeld is the Founder and Managing Partner of Elder Needs Law, a Florida estate planning and elder law firm he created in 2017. With more than 15 years of experience practicing law, he represents clients in a wide range of legal matters, including Medicaid planning, estate planning, elder law, probate, Medicare, and life insurance.

Jason received his Juris Doctor from the University of Miami — School of Law and is a member of the Florida Bar and the Broward County Bar Association. He has received numerous accolades for his work, including being named a Rising Star and Super Lawyer by Super Lawyers and among the Florida Legal Elite by Florida Trend in 2024.

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