Annuities And Medicaid Planning

Filed in Medicaid & Medicare, on July 18, 2017

Basic Medicaid Info

1. When you apply for Medicaid in Illinois, if you are in a nursing home or in an assisted living facility, you must provide complete information about:

  • your income
  • your assets (real estate, bank accounts, investments, bonds, annuities, IRAs, 401k plans, the cash value of life insurance policies, vehicles, etc.)
  • what assets you sold in the past 60 months
  • what gifts you made in the past 60 months
  • what you have prepaid for your funeral/cremation plans
  • if you are married, your spouse must also provide info about his/her income and assets, and what your spouse has done with his/her assets in the past 60 months

2. Small incidental gifts (such as for a child or grandchild’s birthday, or Christmas present, or other special occasion or small gifts to charities) normally should not create a problem (should not cause a penalty period) if they were not made to avoid having the money/assets available to pay for your costs at the facility.

3. Gifts to your loved ones (made in the 60 months prior to you applying for Medicaid) can cause you to be disqualified for Medicaid for a period of time.

Gifts made during the 60-month look back period can create a penalty period (a period of time when you won’t qualify to receive Medicaid benefits).

But with proper planning, you can use your monthly income (social security and/or pension) along with monthly annuity payments to you to cover most of the penalty period. The amount you are short each month will need to be paid by the loved ones that you made gifts to before applying for Medicaid. (The plan will create a “penalty period” because of the gifts you make, but the plan will include you also paying a lump sum of money to a company that will provide you with an annuity (which will make specific monthly payments to you to help you cover most of the costs of the facility for each of the months of the penalty). The calculations will be done by your elder law attorney in consultation with a financial services company that specializes in Medicaid Compliant Annuities). You must be sure to ask questions if you don’t understand the plan.Gifts made during the 60-month look back period can create a penalty period (a period of time when you won’t qualify to receive Medicaid benefits).

How an Annuity Is Used in Medicaid Planning

1. A calculation will be done by your elder law attorney to determine how much you can gift to loved ones. Such calculation will also take into account any prior gifts you made that will cause a penalty period. So you must be sure to inform your lawyer about all significant gifts that you made to loved ones or charities.

2. A penalty period will be calculated (meaning how long of a period you will be disqualified from receiving Medicaid, which could be for many months).

3. You will sign a contract to purchase an annuity. I like to use Krause Financial Services Inc. (KFS) to obtain the annuity (and assist with the calculations). KFS will be paid a minimum of $1,000 for their work (if you decide to get the annuity). KFS will assist with the calculations (to determine how much to gift and how much to put into the annuity) without charge (they are only due a fee if you go ahead and sign the contract to purchase the annuity).

4.The annuity will state the following:

  • your name as the annuitant
  • the annuity company’s name
  • the amount of money paid to the annuity company
  • that the company will pay back so much in total (including some interest)
  • how much the company will repay to you each month
  • when monthly checks will start to come to you
  • that if you die before all money has been repaid to you, then the State of Illinois will have the right to be reimbursed first for any Medicaid benefits you have received (and the annuity company must continue to make the repayments) before any remaining money may go to your relatives

5.You will sign the annuity contract, then mail it in with a check to the annuity company (and a check to Krause Financial Services Inc. for their work)

6.If all other planning has been done, then you will apply for Medicaid (first checking with your elder law attorney to make sure everything is in order).

7.The annuity checks will begin to come to you (and help pay part of the facility’s monthly charges). Your monthly income (social security and/or pension) will also help partially pay the facility. The monthly shortfall (what isn’t cover by your income and the loan repayment check) will be paid by one or more of the loved ones who received gifts from you.

8.You cannot use an existing annuity you have. You must purchase a new, special annuity (the amount paid each month, and the number of months it will pay, are all planned out specifically). The annuity can be arranged with the help of your elder law attorney through Krause Financial Services, Inc. There would be a minimum fee of $1,000 to FFS to go this route.

9.The Illinois Dept of Healthcare and Family Services defines an annuity as follows (PM 07-02-17), “An annuity is a contract to receive, fixed periodic, payments, either for life or for a specified number of years. When an annuity is purchased, the person usually pays a lump sum premium in exchange for guaranteed payments.”

An annuity could also be purchased to pay you for a specified number of months (rather than a number of years).


What is an “allowable transfer”?

An “allowable transfer” doesn’t create any penalty period (the giver is not penalized for making the gift). Here are some examples:

  • Al & Pam are married and they reside in a condo which they own jointly. Al will being going into a nursing home. Al may transfer/gift his interest in the condo to his wife Pam as an allowable transfer.
  • Ed & Flo are married and reside in a condo. They jointly own a car and $80,000 in bank accounts (their only assets). Flo enters a nursing home and applies for Medicaid. Flo can transfer/gift her interest in the car and the bank accounts to Ed as allowable transfers.
  • Jim is widowed. He has a son (Hal) who is age 54. Hal is disabled, and he is on Medicare and he receives Social Security Disability Income. Jim owns a townhouse (worth $125,000) and he has about $30,000 in bank accounts. Jim has a burial plot and he has already prepaid for his funeral expenses. Jim has no debts. Jim may transfer/gift his townhouse and the money in his bank accounts to his disabled son Hal as allowable transfers. (Because Hal is disabled, the gifts to Hal are considered “allowable transfers” and don’t negatively affect Jim’s eligibility for Medicaid benefits.)

What is a “non-allowable transfer”?

A “non-allowable transfer” creates a penalty period (a period of time where the giver, or his/her spouse, doesn’t qualify for Medicaid benefits). The more valuable the non-allowable gift, the longer the penalty period will be. Here are some examples:

  • Tom is a widower. Tom owns a house (worth $70,000) and has about $85,000 in bank accounts. Tom has 2 children (who are both healthy – not disabled). Tom transfers his house to his son Kent. Tom gives $70,000 (by check) to his daughter Sara. Tom enters a nursing home (or assisted living facility) and he applies for Medicaid within 60 months of making those gifts to his children.
  • Leah is age 72 and single. Leah owns a condo (worth $80,000). Leah must enter a nursing home. Leah gifts her condo to her disabled sister Jane (who is age 69) a month before Leah applies for Medicaid. The gift to Jane is a non-allowable transfer. (Although under Medicaid rules, you can transfer assets directly to your disabled child, you cannot gift your assets directly to a disabled sibling.)
  • Lil is residing in an apartment. She has $60,000 in bank accounts. Lil has no debts. Lil has a burial plot and she has prepaid her funeral costs. Lil must soon enter a nursing home. Lil only has about $1,200 in monthly income. Lil wants to gift $12,000 to her church. A gift to the church will be considered a non-allowable transfer (and Lil won’t receive Medicaid benefits for about 2 months if she gives $12,000). She should not do it.

Why can’t I just gift to my loved ones, and then pay the nursing home each month with the rest of my money?

If you make gifts to loved ones, have money to pay the facility for a number of months, and then apply for Medicaid, the following will occur:

  • a penalty period will be assessed because of any non-allowable gifts you made
  • you will have to spend your assets/money down to $2,000 before the penalty period will start (thus you must basically be broke before the penalty period begins, and you will only have income to pay the facility – you won’t have sufficient assets to be available to pay the facility’s month fee during the penalty period)
  • this will result in your loved ones having to return to you some or all of the assets/money that you gave them (the non-allowable gifts)

Note that if you make any non-allowable gifts, and you have enough remaining assets (and income) to pay for 60 months of future nursing home care, then you might be able to make the non-allowable gifts to loved ones, pay your nursing home care costs for 60 months, and then apply for Medicaid after 60 months have passed.

What other options are available?

Instead of purchasing an annuity, you could loan money to a loved one (who will sign a promissory note) who will pay you money back each month to help cover the facility’s costs during the penalty period. The borrower will pay you back in a calculated manner, also paying you some interest:

  • Nan was living in her daughter’ home. Nan has paid all her debts (she has a burial plot and her funeral expenses are paid). Nan gives $42,900 to her son Jerry (which will cause a 6.5-month penalty period). Jerry is not disabled (and thus the gift to Jerry is a non-allowable transfer). Nan has entered Best Senior Home (BSH) which charges $220 per day (its lowest priced room). Nan has $1,200 per month from her social security to pay the facility’s charges where she now resides. (Nan gets $1,425 deposited into her checking account from Social Security each month. She pays $175 to AARP each month for her Medicare supplemental policy. Nan pays Blue Cross Blue Shield $50 monthly for her Medicare Part D plan.) Nan lends her sister Beth $37,000 in May 2013 (and Beth signs a promissory note) the same month. The promissory note states that Beth will pay back Nan monthly $5,353 for 7 months (June, July, Aug, Sept, Oct, Nov, Dec). Thus Beth will pay a total of $37,370 to Nan (the $37,000 that Beth borrowed, plus $370 in interest). In June, BSH will be owed $6,820 (31 days x $220 per day). Nan’s social security will pay $1,200 of BSH’s bill. The monthly check from Beth of $5,353 will go into Nan’s account, and that money will pay a lot of the June bill. In June, the shortfall will be $267. (In July, the shortfall will be $487. In August, the shortfall will also be $487. In September, like June, the shortfall will only be $267 since there are only 30 days that month.)

Why can’t my monthly income and the money I receive each month from the annuity cover “all” to the facility’s costs for each month of the penalty period?

If a 5-month penalty is assessed against a Medicaid applicant (MA) because of non-allowable gifts that the MA made, then once the MA has spent his/her assets down to two thousand dollars ($2,000), then the 5-month penalty period begins. A month only counts as a “penalty month” if the nursing home is not paid in full from the MA’s income and assets (not counting the $2,000 that the MA is allowed to have, now called the “resource disregard” in Illinois):

  • Lou was living in an apartment. He has sold his car, and he has paid all his debts (and his cremation expenses are paid). Lou gives $30,000 to his son Jeff (which will cause a 5-month penalty period). Jeff is not disabled (and thus the gift to Jeff is a non-allowable transfer). Lou has entered Heavenly Senior’s Home (HSH) which charges $200 per day (its lowed priced room). Lou has $1,000 per month from his social security to pay the facility’s charges where he now resides. (Lou gets $1,225 deposited into his checking account from Social Security each month. He pays $175 to Humana each month for his Medicare supplemental policy. Lou pays AARP $50 monthly for his Medicare Part D plan.) Lou pays $23,500 in June 2013 to get an annuity (and Lou signs a contract with the annuity company). The annuity will pay Lou monthly $4,747 for 5 months (July, Aug, Sept, Oct, Nov). Thus the annuity will pay a total of $23,735 to Lou (the $23,500, plus $235 in interest). In July, HSH will be owed $6,200 (31 days x $200 per day). Lou’s social security will pay $1,000 of HSH’s bill. The monthly check from the annuity company of $4,747 will go into Lou’s account, and that money will pay a lot of the July bill. In July, the shortfall will be $453. (In August, the shortfall will also be $453. In September, the shortfall will only be $253 since there are only 30 days that month.)

May I use my $2,000 (the “resource disregard”) to the shortfall each month?

You can use your $2,000 to help cover the monthly shortfall during the penalty period, if you need to do so.

Who pays my prescription drug costs during the penalty period?

If you take prescription drugs that aren’t fully paid for by your private health insurance coverage, then you (or your loved ones) will need to pay for your prescription drugs during the penalty period.

Do other lawyers in Illinois use the annuity method?

Use of the annuity method is a common method in Illinois. I believe that most elder law attorneys choose to use the annuity method when non-allowable gifts are made and a plan is created to help cover the facility’s costs during the penalty period (rather than the promissory note method).

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