One of the requirements of the Deficit Reduction Act of 2005 (“DRA”) was that the State Medicaid agency must be listed as a remainder death beneficiary on an annuity contract. So, naturally, clients often ask us why they should consider purchasing a Medicaid Compliant Annuity (“MCA”) if the State Medicaid agency must be listed as beneficiary. In order to answer that question, it is helpful to understand the planning techniques that are used in both individual (no spouse) and community spouse cases.
Individual Cases:
In most Crisis Medicaid Cases involving an individual client (no spouse), the goal is to make a gift of the Medicaid applicant’s countable assets and use a portion of the remaining assets to purchase a MCA to privately pay during the private pay/penalty period. Since the annuity is being used to provide income to the Medicaid applicant during the private pay/penalty period, if the annuity owner passes away during the annuity term and was never receiving Medicaid benefits, the State being listed as beneficiary has no impact on the annuity because the State was not providing Medicaid benefits to the annuity owner during the annuity term. Therefore, after receiving a Clearance Letter from the State Medicaid Agency, the remaining annuity amount would be paid to the contingent/secondary beneficiaries which is usually the Medicaid applicant’s children, a trust, etc.
Community Spouse Cases:
In most Crisis Medicaid Cases involving a married couple wherein one spouse is in a nursing home applying for Medicaid and the other spouse (community or well spouse) is residing at home, the goal is to convert the couple’s excess countable assets above the Community Spouse Resource Allowance (CSRA) into an income stream using a MCA. When the MCA is being purchased with non-IRA/after-tax dollars, it is most common for the community spouse / well spouse to be the MCA owner, annuitant, and payee. The reason the community spouse typically purchases the MCA is that the community spouse is entitled to unlimited monthly income without having to contribute his/her monthly income toward the ill spouse’s cost of care. With the community spouse being the annuity owner and payee, the annuity term is based on the community spouse’s life expectancy. In order for the annuity to be “actuarially sound” the annuity must pay the original investment amount back to the annuity owner within his/her Medicaid life expectancy. The annuity term may be structured for a timeframe less than the community spouse’s life expectancy. The beneficiary designation only comes into play if the community spouse predeceases the annuity term. For example, if we structure the community spouse’s annuity term to payout for 5 years and the community spouse lives for another 10 years, the beneficiary designation is never triggered because the community spouse was alive to receive all 5 years of payments. However, if we structure the community spouse’s annuity term to payout for 5 years and the community spouse passes away 3 years after purchasing the annuity, there are 2 years of remaining payments. In this second example, we would notify the insurance company of the community spouse passing, reach out to the State Medicaid Agency to obtain the amount of benefits provided on behalf of the Medicaid applicant, and proceed from there.
In summary, I’m hopeful that these planning techniques helps clients to understand that just because the State must be listed as a beneficiary of a MCA does not mean that the State will automatically receive all of the annuity proceeds upon the MCA owner passing. If you have questions, please contact us via phone 888.441.1595 or click here!
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