I hate to sound like a broken record, but another federal court decision was just published that supports the use of annuities as a Medicaid planning technique.  Medicaid is a federal and state health insurance program for needy individuals.  Unlike most health insurance programs, Medicaid will pay for long-term care, such as care in a nursing home or assisted living residence.

How This Ruling Impacts Medicaid Planning

This discussion focuses on a specific federal court decision affecting Medicaid eligibility planning. While Social Security is a separate federal program, the issues addressed here relate exclusively to Medicaid rules, annuities, and long-term care planning—not to Social Security benefit qualification or administration.

Many people who need long-term care seek to qualify for Medicaid benefits.  Nursing homes in New Jersey can cost up to $12,000 a month, so even people who have a decent amount of money can be bankrupted very quickly by long-term care costs.

Annuities have been used as a technique to aid a person in qualifying for Medicaid benefits for several years now.  Typically, the purchase of an annuity is used when there is a couple involved with the planning.

Assume the following:  Mr. Smith enters a nursing home.  Mrs. Smith remains at home and is in reasonably good health.  The Smiths own a home, a car, and about $300,000 in cash.

The Medicaid program pools a couple’s assets, so it is irrelevant whether the $300,000 is in Mr. Smith’s name, Mrs. Smith’s name, or jointly-held between the Smiths.  Whatever assets one member of a couple owns the other member of the couple owns.

The Medicaid program will permit Mrs. Smith to retain the home, the car, and about $115,000 of the cash.  Mr. Smith can retain no more than $2,000 of the cash.  So, in order to qualify for Medicaid, the Smiths will have to “spend down” their cash assets to $117,000 ($115,000 for Mrs. Smith and $2,000 for Mr. Smith).

To “spend down” simply means to spend your money.  Without planning for Medicaid eligibility, most of the spending down that the Smiths will be doing will be in the form of paying Mr. Smith’s $12,000 per month nursing home bill.  Paying that bill, the Smiths will have accomplished their $185,000 spend down ($300,000 – $115,000 = $185,000) in about fifteen months.

Think about that, the Smiths worked their entire lives to accumulate $300,000 in savings.  If they are anything like the current older generation, the Smiths probably went without many of the luxuries in life—vacations, newer clothes, going out to eat.  They wanted to ensure that they had money so they would never be a burden on anyone and so they could pass something to their children when they died.

But the cost of long-term care drives their savings down 66% in fifteen months.  In another ten months, they’d be completely bankrupt.

Unlike assets, which are pooled between the couple, income belongs to the individual whose name is on the check.  So, if Mr. Smith has Social Security income of $1,500 per month and a pension of $500 per month, that is his income.  If Mrs. Smith has Social Security income of $1,000 per month, that is her income.  There is no pooling of income.

The purchase of an annuity, structured properly, can be used to convert excess assets (the $185,000 in the Smiths’ case) into a stream of income.  If that stream of income belongs to Mrs. Smith, not Mr. Smith, it will not count against Mr. Smith for purposes of eligibility for Medicaid.  Needless to say, the various states hate this fact.

In a recent federal appeals court case out of the federal Eight Circuit (the federal circuit serving North Dakota and some other states), the court shot down a multitude of arguments that the state of North Dakota and various other states were making against the use of annuities as a Medicaid planning technique.

In this case, entitled, Geston v. Anderson, the states of Hawaii, Kansas, Maryland, New Mexico, Oklahoma, Rhode Island, Tennessee, and Connecticut joined with the state of North Dakota, hoping to impress the court with their concern over the use of annuities and to support North Dakota’s attempt to prevent annuities to be used as a Medicaid planning technique.

They lost.  And the states didn’t kind of lose, they were shot down in flames on every argument they made.

This ruling does not change Social Security benefit rules but has important implications for individuals planning for Medicaid eligibility.