A recent New Jersey federal court decision reaffirms the use of annuities as a Medicaid planning device. Medicaid is a health insurance program for needy individuals. In order to qualify for Medicaid, an individual must have a limited amount of assets and his income must be insufficient to pay for the cost of his care.
When dealing with a married couple, Medicaid combines the assets of the couple. No matter which spouse owns the asset, the asset is owned by both spouses as far as Medicaid is concerned. Because of this fact, the Medicaid laws permit the spouse who does not need care, called the “community spouse,” to retain a certain amount of assets. For instance, the community spouse can retain the house, a car, and up to a maximum of $115,000 in cash assets. All other assets must be spent down before the spouse who requires long-term care, called the “institutionalized spouse,” can qualify for Medicaid.
Income is treated differently than assets. As stated, assets of a married couple are combined and it is wholly irrelevant which spouse owns the assets. Income, on the other hand, belongs to the spouse to whom the check is made payable. This is known as the “name on the check” rule. If the community spouse receives Social Security of $1,000 per month and a pension of $500 per month, then that $1,500 is her income and does not count against the institutionalized spouse’s eligibility for the Medicaid program. If the institutionalized spouse has fixed monthly income of $2,000, then that is his income.
Only if the institutionalized spouse’s monthly income exceeded the cost of his care would he be ineligible for the Medicaid program. For instance, if the institutionalized spouse were residing in a nursing home and the nursing home cost $9,000 per month, but the institutionalized spouse had fixed monthly income of $11,000 per month, then the institutionalized spouse would not qualify for Medicaid. The amount of his income would exceed the cost of his care in this example, so he is ineligible for Medicaid.
The community spouse’s income does not affect the institutionalized spouse’s eligibility for Medicaid. For instance, if the institutionalized spouse’s income were $2,000 per month but the community spouse’s income were $11,000 per month and the cost of care were $9,000 per month, then the institutionalized spouse would qualify for Medicaid, if his assets were at the appropriate level. The cost of his care ($9,000) exceeds his monthly income ($2,000), so he is eligible for Medicaid.
Annuities are used as a planning technique to convert excess assets into a stream of income that belongs to the community spouse, not the institutionalized spouse. For instance, assume that Mr. and Mrs. Smith own a house, a car, and $300,000 in cash assets. Assume that Mr. Smith enters a nursing home, and Mrs. Smith wants to qualify Mr. Smith for Medicaid benefits, which will pay for the costs of the nursing home.
Medicaid will permit Mrs. Smith to retain the home, the car, and $115,000 in cash assets. The Smiths continue to have $185,000 too much in cash assets; however, If Mrs. Smith were to use that excess $185,000 to purchase a certain kind of annuity in her name, she would effectively convert the excess $185,000 in assets into a stream of income that belongs to her and that does not count against Mr. Smith’s eligibility for Medicaid. Mr. Smith would qualify for Medicaid immediately.
In the recent federal court case, the State challenged certain wording in the annuity contract, claiming that the wording prevented the annuity from complying with the requirements of the Medicaid laws. The federal court ruled against the State, holding that the annuity did comply with all of the requirements of the Medicaid laws. This case is yet another federal victory in a long string of federal victories on the subject of annuities planning in the context of Medicaid.