The Deficit Reduction Act of 2005 (“the DRA”) was signed into law by President Bush on February 8, 2006. The provisions of the DRA were designed in part to make it much more difficult for an individual to transfer his or her assets with the goal of becoming eligible for Medicaid coverage of nursing home and other expenses. On December 20, 2006, the President signed the Tax Relief and Health Care Act of 2006, which contained a “technical amendment” of the DRA dealing with the treatment of annuities in elder law planning which makes the use of immediate annuities less attractive than under the original version of the DRA.
For Medicaid qualification purposes, assets are categorized into “countable resources” and “exempt resources.” Examples of countable resources are cash, checking accounts, savings accounts, certificates of deposit, stocks, bonds, mutual funds, deferred annuities, real estate other than the primary residence, and any cars after the first one. Exempt resources include a personal residence (the DRA imposes a cap on equity of $500,000, which can be increased to $750,000, if the state elects to do so), one car or truck, burial plots, certain life insurance policies, furniture and furnishings, and common types of jewelry. In some states, a retirement account such as an IRA is also an exempt resource as long as it is paying out the annual minimum distributions required by the IRS.
An “institutionalized” person (the nursing home resident seeking Medicaid for nursing home care) can only have a small amount of “countable resources.” In most states, the amount is $2,000. Where the institutionalized person is married, the spouse of the institutionalized person (known as the “community spouse”) can keep an additional amount of countable assets. These funds, known as the “Community Spouse Resource Allowance” or “CSRA”, can be as much as $101,640 (or in some states half of the couple’s total countable assets up to this amount) in 2007.
Immediate annuities have been used to convert countable assets into an income stream which does not make the institutionalized person or spouse ineligible for Medicaid coverage. An immediate annuity is a contract with an insurance company under which, in exchange for a lump sum payment, the company agrees to pay the annuitant a monthly amount for a period of time. The duration of the payments may be a fixed number of years, for life, or a combination of the two – that is life with a certain number of years guaranteed.
Prior to the DRA, if the annuity met certain requirements the conversion of countable assets into an income stream was not considered a transfer of assets and the institutionalized person could spend down his assets and qualify for Medicaid coverage.
If the annuitant was a single institutionalized person, the monthly annuity payments would have to go to the nursing home. The annuity would pay off only if the institutionalized person died during the annuity’s guaranteed payment period, in which case the balance of the guaranteed payments could go to the beneficiaries under the annuity.
Immediate annuities have always made a lot more sense for community spouses. The community spouse could liquidate excess assets and convert the assets to an income stream that would continue to support them.
The DRA, in language that was less than clear, attempted to restrict the use of annuities. It required that, upon the death of the annuitant, the state Medicaid agency be reimbursed for its payments on behalf of the annuitant out of any remaining guaranteed annuity payments before they are paid to any other remaindermen. By using the term “annuitant” this new repayment obligation only applied to annuities purchased by the institutionalized person where he was also the annuitant. Annuities purchased by the community spouse would only have to repay the state Medicaid agency if she also needed Medicaid-covered nursing home care during the annuity’s guaranteed payment term.
The new technical amendment changes the language requiring repayment from annuitant to institutionalized individual. The result is that the community spouse must now name the state Medicaid agency as the remainder beneficiary on her annuity for any payments made on the institutionalized spouse’s behalf.
The change in the law makes annuities somewhat less attractive than they were before. But it doesn’t mean that this type of planning is dead. The new rule means that if the community spouse dies before the end of the annuity term, the future annuity payments will go to the state Medicaid agency. But the advantages of purchasing the annuity in terms of ending a huge outflow of savings to pay for nursing home care and guaranteeing the community spouse enough income to pay her basic needs are so great that the planning technique still makes sense in some circumstances.
The technical amendment will likely cause shorter-term immediate annuities to be used. The shorter the guaranteed term certain of an annuity, the higher the monthly payment. In the past, a community spouse might opt for a lifetime annuity with smaller monthly payments, which would be a terrific investment if she lived longer than her actuarial life expectancy. Community spouses now are more likely to choose a shorter, term-certain benefit period, rather than a benefit for life. Under this planning approach, the community spouse will have her funds returned quickly and she will be more likely to outlive the annuity, resulting in lesser likelihood of repayment to the state.