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Article: Using Annuities in Long Term Care Planning

Q.  My wife and I do not have long-term care insurance and we are concerned about how we would pay the cost of care if one of us had to go into a nursing home, which I understand is very expensive. I heard that purchasing an annuity might help us qualify for a Medi-Cal long term care subsidy to help with that cost. Can you explain how that might work?  

A.  Sure. For a married couple to qualify the ill spouse for a Medi-Cal subsidy, the couple’s countable assets cannot exceed $128,640 (in year 2020) (excluding the home and certain exempt assets).  If the value of their assets is greater, the couple can sometimes make the excess legitimately “vanish” in the eyes of Medi-Cal by using that excess to purchase an immediate annuity, providing that it meets certain requirements. This annuity purchase can convert a couple’s excess assets into a stream of income, whereupon the excess no longer counts as an asset.

In the event of need for nursing care, a couple may thereby quickly reduce their countable assets down to Medi-Cal limits and thereby qualify the ill spouse for a Medi-Cal long term care subsidy. If properly designed, the annuity purchase also avoids Medi-Cal transfer penalties and “pay back” requirements.

However, the annuity must meet certain very special requirements. Unfortunately, we find that most seniors who already own annuities have contracts that do not meet these special Medi-Cal requirements.  While such “nonqualified” annuities may help generate retirement income, they usually cannot be used for Medi-Cal planning and in many cases make such planning more difficult. However, these “nonqualified” annuity contracts can sometimes be converted into contracts that do meet Medi-Cal requirements.

Perhaps the best use of an annuity for Medi-Cal planning is in the case of a married couple, one of whom needs nursing home care. Aside from facilitating a Medi-Cal subsidy for the nursing- home spouse, the purchase may entitle the “at-home” spouse to retain all of the annuity payments for his/her own needs without requiring contribution toward the other’s long-term care expense. This arrangement may thereby enable the “at-home” spouse to maintain his/her standard of living and avoid the financial devastation usually associated with the expense of long-term care.

Immediate annuities, however, are generally less useful as a Medi-Cal planning device for single individuals. If a single individual purchases an annuity, the periodic payments will be treated as income and applied toward that individual’s share of cost, usually resulting in no real benefit.

While specially qualified, immediate annuities can be a powerful Medi-Cal planning tool in the right circumstances, they must be distinguished from deferred annuities which essentially have no Medi-Cal planning purpose. Before investing in an annuity as a long-term care planning strategy, we strongly suggest that you consult an elder law attorney knowledgeable in Medi-Cal planning. The law is changing in this area and up-to-date advice from a qualified professional is essential.

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