I’m getting to sound like a broken record, but I am going to write about a recent victory in federal court involving the use of annuities for purposes of Medicaid planning.

Medicaid is a federal-state health insurance program for needy individuals.  In order to qualify for Medicaid, an individual must have a very limited amount of assets and must have income insufficient to pay for the cost of his care.

When one member of a married couple seeks to qualify for Medicaid, the law pools the assets of the couple; accordingly, it is wholly irrelevant which member of the couple owns the assets.  Whatever assets the wife owns, the husband owns, and whatever assets the husband owns, the wife owns.

For instance, assume that all of the couple’s assets are in the wife’s name.  Perhaps it is a second marriage and the wife brought all of the assets into the marriage.  Even if the wife inherited the assets that she brought into the marriage, the result would be the same.  While the wife would get all of the assets in a divorce—because the assets are pre-marital and an inheritance—the laws governing the Medicaid program are without sympathy.  As far as the Medicaid program is concerned, whatever assets the wife owns, the husband owns.

Income is treated differently.  Income, unlike assets, is not pooled.  The wife’s income is the wife’s income, and the husband’s income is the husband’s income.  If the wife has $1,000 in Social Security income, that is her income.  If the husband has $1,500 in Social Security income and $500 in pension income, that is his income.

If the husband enters a nursing home, the wife may be entitled to retain a portion of her husband’s income under a spousal income allowance provision of the law, but that does not change the fact that the Medicaid program does not pool income.

This income allowance is part of the spousal impoverishment provisions of the Medicaid law.  The law has a provision governing income, which permits the wife to retain a certain amount of the husband’s income once he qualifies for Medicaid.  The law also has a provision that permits the wife to retain a certain amount of the couple’s resources.

The wife can retain all of the non-countable resources, such as the house, a car, and personal effects.  The wife can also retain up to $115,000 in countable resources, such as cash, stocks, bonds, etc.  Anything over the $115,000 maximum must be spent down before the husband can qualify for Medicaid; at least, that’s what the Medicaid Office will tell you.

My job as an elder care lawyer is to help preserve assets for the wife, so she can have a sufficient amount of assets on which to live after her husband qualifies for Medicaid.  For instance, the house, a car, and $115,000 in assets may prove insufficient for a wife who is used to having $300,000 in savings.  This is compounded by the fact that the wife may not be able to retain all of her husband’s income under the spousal income provision, so she may have the same amount of expenses with far less fixed income to pay those expenses.

One technique for preserving extra money for the wife involves the purchase of an annuity in her name.  If structured correctly, the annuity can convert excess assets, which are pooled, into a stream of income that belongs to the wife, not the husband.

The extra income will probably eliminate the wife’s entitlement to any income from the husband, because her monthly income, with the annuity payments, will be fairly high, but the annuity also gives the wife much more money than the Medicaid program would permit her to retain.  For instance, if the couple has $300,000 in countable resources, Medicaid will permit the wife to retain $115,000, and with the purchase of an annuity, the wife can retain the remaining $185,000 in assets.

A recent New Jersey federal district court decision reaffirms the use of annuities in this manner.  This is probably the tenth federal court case of which I am aware that affirms this technique, so I’m feeling pretty good about it.