Medicaid Annuities: “Friendly” vs. “Compliant.” Do you Know the Difference?

By: Mike Anthony, JD |        email:[email protected]      

          Somehow over the years the terms Medicaid “Friendly” Annuity and Medicaid “Compliant” Annuity have entered the planning lexicon.  Most people without much background in this work use them interchangeably – but they really have different meanings.  If you’re not aware of the difference or why you should never use the term Medicaid Friendly Annuity, I encourage you to read on.

          Annuities have been used as a valuable planning tool to help many families convert excess resources into an income stream. The original doctrine on annuities came down in the form of HCFA Transmittal 64. These rules were in conjunction with the implementation of 3-year look back period contained in OBRA 93. It laid down a set of things an annuity stream must include in order to not be consider a transfer for less than fair-market value – which would cause a transfer penalty.

            Originally the annuity had to be a single premium immediate annuity (SPIA) that was actuarially sound and pay out all payments within the life expectancy of the owner as based on the Social Security Life Expectancy Table. Any payments that exceed that are considered transferred for less than fair-market value. The annuity also need be irrevocable and not be able to be sold or liquidated (i.e., non-commutable and non-assignable). The accumulation of these rules became the foundation for the Medicaid Compliant Annuity.

            In 2006, the DRA added extra requirements that included level, equal payments and naming the state as a primary or secondary beneficiary depending on the owner’s circumstances. The level payment requirement was coupled with an all-out declaration that balloon-style annuities would create a transfer penalty. This eliminated the use of balloon-style annuities that were effective for single patients, but allowed for the continued use of level annuities for community spouse cases where converting excess assets to an income for the healthy spouse makes sense.

            The SPIA that is designed to comply with all these rules is what is commonly known as the Medicaid Compliant Annuity.  It is not your garden variety annuity and rarely does anyone use these annuities in general estate planning.  It is a specific tool to use in a very specific case and quite often the design of the annuity is also specific and personal to the patient’s circumstances. That’s especially true since you have to designate the state as a beneficiary for the care paid for by the state for the infirmed spouse.  Anyone foolishly trying to use the Medicaid Compliant SPIA before there is a care crisis or a defined patient would have to have clairvoyance that no Medicaid Planner possesses.

            That brings us to the term Medicaid Friendly Annuity.  Let me start out by saying that there is no such thing as a Medicaid Friendly Annuity.  A SPIA is both specific and compliant or it’s not.  The term Medicaid Friendly Annuity entered the planning lexicon as a term of hyperbole by overzealous annuity salespersons.  It has been primarily used to describe any annuity that’s used for estate planning purposes that can later be annuitized and made compliant.

            There are more problems with using that term than it’s worth. First, deferred annuities are countable assets. Just because a deferred annuity can be annuitized does not automatically make it compliant with the Medicaid rules. Most companies will not convert their deferred annuities into a Medicaid Compliant Annuity and those that do will often charge the same surrender fee that would be paid if the deferred annuity would be cashed out and sent to another company that has a Medicaid Compliant Annuity.

            Second, misrepresenting a deferred annuity’s ability to be protected from the Medicaid spend down is nothing short of economic exploitation of the elderly. Selling someone a deferred annuity on the basis that it will somehow later be able to be protected from the Medicaid spend down is disingenuous and possibly unethical.  And yet I still see case after case where a person owns an annuity thinking it’s protected from the Medicaid spend down because the annuity agent said it was Medicaid Friendly. 

            Bad Example

            A case in point. Recently an advisor from Florida called me and said he had a client in the nursing home. Two years ago the patient’s financial advisor put almost all of her liquid assets in a deferred annuity he told her was “Medicaid Friendly.” She was led to believe that the money in the deferred annuity was protected from the spend down. The family was irate to see that this fast-talking salesman had misled their mother and now not only were the assets not protected from the Medicaid spend down, but to move them and do something with them that could protect some or all of them they would incur about $20,000 in surrender charges. No annuity would solve this lady’s spend down problems and the false hope that the deferred annuity had solved the problem kept them from pursing viable asset protection plans.

            If you sell annuities, unless you are using a Medicaid Compliant SPIA in a specific instance to solve a specific Medicaid spend down problem, I highly advise you to not use Medicaid or the term “Medicaid Friendly Annuity” in the sales of your deferred annuities unless it’s part of a specific Medicaid Asset Protection Plan.  There are lots of hungry lawyers out there looking for idiot annuity salespersons that misrepresent their products to seniors and this is one of the areas where you the greatest exposure if you don’t know what you’re talking about.

            Medicaid Compliant Annuities are still a viable way to solve many Medicaid spend down problems.  When used properly, they can be a godsend to the community spouse when a health crisis threatens financial ruin.  If you come across a case where you need help understanding the proper role, function and structure of a Medicaid Compliant Annuity, look no further.  Our team has a comprehensive support for attorneys, financial advisors, geriatric care managers and CPAs to help them with their Medicaid planning cases.  We offer support for case design strategies, mentoring on Medicaid eligibility issues, assistance with Medicaid Compliant Annuity suitability, and help with marketing your services.

            Whether you’re a new lawyer looking for a niche market to pursue or a seasoned financial advisor wanting to help your existing client base through difficult times, I also teach a clear and concise Medicaid planning course to help even the novice of advisors learn and understand the Medicaid planning process.  My Medicaid Planning Guidebook can be an indispensable desk reference as you deal with clients needing long-term care.  If you’re interested in pursuing the Certified Medicaid Planner™ designation, ask me how becoming a CMP™ can set you head and shoulders above the rest.  As the wave of baby boomers hitting retirement age creates new opportunities in the Medicaid planning field, don’t be left watching from the shore and learn what you’re dealing with so you don’t make the mistake of using the term Medicaid Friendly Annuity when we should only be dealing with properly structured Medicaid Compliant Annuities.