“What is an annuity under Elder Law?”
Many times when we’re helping families plan long term care, or maybe helping out families who are in a long term care crisis, the subject of annuities tends to come up.
An annuity under Elder Law is where we turn an asset into a steady stream of income.
We give money to the insurance company, and they hand us back a contract that says, “We will give you X amount of money back over a span of Y months.”
This is the basic idea.
There are several different types of annuities, but we won’t go into those in this article.
We use these annuities for when a crisis arises.
Let’s say that we’re in an emergency situation where we have to be in the nursing home long term, and we have $400,000.
Well, if we have that much money, then we won’t qualify for Medicaid, which helps pay for long term nursing home care.
If we’re a veteran who could qualify for the VA Pension, then we wouldn’t qualify because we have too much money.
In these cases, we sometimes will take that asset and turn the money into annuities.
There are some very specific rules for Medicaid and VA Pension.
Usually, we can’t go to our life insurance agent and say, “I need a Medicaid compliant annuity.”
They may not necessarily know what that is.
We have to make sure we go to the right person to get these annuities.
Remember, an annuity is taking a lump sum of money and turning it into steady income.
Typically when we’re talking about government benefits, there are two aspects that are looked at.
One is our net worth, or assets.
The second is our monthly income.
We have to qualify under both of these aspects.
Sometimes we have too much in assets, but we can level it out with monthly income, because of how much we’re paying the nursing home or assisted living.
We can convert those assets into annuities, which turn into steady streams of income.
That lowers our assets so that we can qualify for Medicaid.
Let’s look at our $400,000 example
So we might take $200,000 of the money and give that away. Maybe to a child or to a special type of irrevocable trust.
But remember in Alabama Medicaid there is a “five year look back period” from when we are otherwise qualified. The look back is for any gifts.
Well, we just made a $200,000 gift so we have to tell that to Medicaid.
There will be a penalty divisor of about $5800. This means we divide $200,000 by $5,800 (the amount of the gift divided by the penalty divisor of $5800) and the answer is the number of months we have to pay for our own care. No help from Medicaid.
So what is the answer?
About 35 months. 35 months where we don’t get any help but have to pay for our own nursing home care.
So how in the world do we pay our nursing home bill for 35 months?
There are numerous options but in this example we might buy, with the “other” $200,000, a proper Medicaid compliant annuity.
We set up the annuity to pay us for, you guessed it, 35 months.
The same length as the penalty period.
So that pays us about $5700 a month. Combined with our social security, etc. that lets us pay the $7,000 (or whatever) monthly nursing home bill.
Remember it has to be a special approved Medicaid compliant annuity.
If it is, then Medicaid will normally say that “$200,000” for the annuity was not a gift. After all, you are getting fair value in exchange for the $200,000 you paid for the annuity.
(Remember the $200,000 you gave away to a child or the proper type of irrevocable trust is a gift as you did not receive anything back in exchange — it was simply a gift).
So the net result is your family saved $200,000 and still provided the care needed for your loved one.
Obviously there are many factors and exceptions etc that I have not covered — I’m simply illustrating how an annuity can operate to lower assets and increase income. Sometimes that’s exactly what we need in a crisis situation. (We also can do something similar, at times, with VA Pension Aid & Attendance).
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