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Planning Trends and Incorporating Medicaid Planning into Your Practice
Planning Trends and Incorporating Medicaid Planning into Your Practice
Presented by Aaron Kempen

The Logistics of a Medicaid Compliant Annuity

Industry Insights: Episode 7 goes beyond the basics of MCAs to discuss the details behind structuring this powerful tool. Aaron tackles our most common FAQs, including those on Medicaid life expectancy, the actuarially sound requirement, annuity terms, and the potential fees associated with short-term annuities. He also discusses who MCAs are most appropriate for and how to get started in the planning process.

Amy: Hi, I’m Amy Beacham, Communications Director for Krause Financial Services. Welcome to Industry Insights. In this series, we aim to discuss news, updates, and hot discussion topics that affect the elder law space and that are relevant to you as an elder law attorney. Working on hundreds of cases per month and working with attorneys from across the country, we see trends that affect elder law planning, and we want to share some of those insights with you today. Today, we have our Director of Business Development, Aaron Kempen. Aaron is one of our most senior staff members and helps attorneys new to crisis planning navigate this space. Recently, we’ve been receiving a lot of questions regarding the logistics of Medicaid Compliant Annuity planning, so Aaron is going to help answer some of those questions today. Welcome, Aaron.

Aaron: Thanks, Amy.

Amy: So, to get started, the most basic question: what is a Medicaid Compliant Annuity?

Aaron: Yeah, so a Medicaid Compliant Annuity is a single premium immediate annuity that meets the restrictions set forth by the Deficit Reduction Act of 2005. So basically, what the annuity does is it converts what Medicaid would normally view as an asset into simply a stream of income. In order to do that, the annuity needs to meet five criteria. It needs to be irrevocable, non-assignable, actuarially sound, make equal monthly payments, and the state has to be named as a beneficiary. So, as long as all five of those criteria are met, then the annuity would just be considered a stream of income and not an asset.

Amy: Okay. Now, can you explain the actuarially sound definition?

Aaron: Yes, and this is a common question we get. So, the actuarially sound test means that the annuity needs to return its full premium within the individual’s Medicaid life expectancy. So, the Medicaid life expectancy is a number; it’s an age- and gender-based table, so you just simply look up the individual’s age and their gender and it’ll tell you what that life expectancy is. For the annuity to be actuarially sound, the annuity needs to pay back its full premium amount within that life expectancy. So, for example, if you have an individual with a ten-year Medicaid life expectancy, if we put that on a monthly basis, that would be 120 months. So, that means the annuity has to pay its full principal back within 120 months. If the annuity is 121 months, for example, it would not meet the actuarially sound test, and it would not be considered Medicaid compliant, thus subject to penalty. A common question that we get–or a common misconception is that the annuity needs to be structured over the full Medicaid life expectancy of the individual, and that’s just simply not true. The annuity may be shorter than. So, if that person, that 120-month life expectancy example–in most states, you can purchase a 48-month Medicaid Compliant Annuity, and that would still meet that test because it’s shorter than.

Amy: Okay. Now, what about lifetime annuities? I know we get a lot of questions on that.

Aaron: We do get a lot of questions on that. And generally speaking, lifetime annuities are not going to be Medicaid compliant because they’re not going to return that full premium within their Medicaid life expectancy.

Amy: Okay. Now, another requirement–the state being named as beneficiary. Can you explain that a little bit? And why would someone want to do this type of planning if they have to name the state as beneficiary?

Aaron: Yeah, a lot of attorneys get concerned when they see one of the criteria is the state has to be named as a beneficiary. They’re like, “Well, why would I buy this annuity if the state’s just going to recover anyway?” Well, there are ways that we can avoid–potentially avoid–a Medicaid estate recovery from the annuity. So, the easiest example is with a single person case. If you do a Gift and Annuity strategy, unless that individual was previously on Medicaid, more than likely the state’s not going to be able to recover from the annuity because that individual–the Medicaid applicant–would be privately paying through the penalty period the entire time. So, the state’s not paying anything. And for a married couple case, if we go back to the actuarially sound test, since we can structure the annuity for a term that’s less than that individual’s Medicaid life expectancy, we can use a shorter-term annuity. So, we would want to choose a term of the annuity that we’re confident that that individual is going to outlive, thus avoid any state payback. Being that it’s a single premium immediate annuity, it’s going to make a fixed number of payments. So, for example, if we purchase a 48-month Medicaid Compliant Annuity, after the 48th payment, the annuity is going to be closed out. The annuity will not make a 49th payment. So, as long as that community spouse outlives the term of the annuity, there’s not going to be a payback because there’s going to be nothing left for the state to recover.

Amy: Okay. So, it sounds like there’s some flexibility on how we structure a plan for a married couple to help mitigate that risk.

Aaron: Correct. Absolutely.

Amy: So, another common question is regarding fees. Can you talk about that a little bit?

Aaron: Yeah, so if you’re purchasing what we refer to as a short-term annuity, meaning the term of the annuity is less than 48 months, we do charge a fee for that. And that fee will be fully disclosed when we send a quote or any formal planning letter to you. And that fee is typically paid for by the client. It’s typically part of the client’s spend-down amount, much like your legal fees that the client is paying to the attorney. Now, if the term of the annuity is 48 months or greater, there is no fee, and we just simply receive a commission from the insurance company.

Amy: Okay. Now, what is the minimum that someone might need in order to conduct this type of planning–the minimum amount of assets?

Aaron: Sure. So, the minimum term of the annuity is two months, and the minimum annuity premium amount is $5,000. However, we have gotten exceptions in the past on a case-by-case basis for premiums less than that. We work with seven carriers nationwide. Each carrier is going to have their own various criteria, so when we’re working with your client, we’ll choose what annuity carrier’s best for your client’s particular situation.

Amy: Okay. So, it sounds like even if someone has a limited number of assets, a Medicaid Compliant Annuity might still be a good option for them.

Aaron: Correct. If your client’s in a nursing home, they’re privately paying, they have excess countable assets, more than likely, an annuity will work for your client. So, you should give us a call.

Amy: Perfect. Now, last question: how does someone get started in a Medicaid Compliant Annuity case?

Aaron: Great question. And we’re very easy to work with. You can give us a call, you can send us an email, you can go on our website––and there are various quote-request tools online. We want to be considered your easy button, your back office. One thing that new attorneys find extremely helpful is scheduling what we refer to as a discovery call with me where I’ll work with the attorney, learn a little bit about their practice, their background, and then discuss all the opportunities, the planning strategies, and all the products that we offer, so that attorney has a good understanding of how to work with us, what’s expected of us, what we expect of them. So, you can schedule a discovery call with me, and I’ll be happy to discuss all those options with you.

Amy: Okay, perfect. Well, thank you, Aaron.

Aaron: My pleasure, Amy.

Amy: For more information on how to use a Medicaid Compliant Annuity in practice or to get started on your next case, be sure to contact our office at 855-552-5893. Thanks for watching.

Watch Next:

Planning Trends and Incorporating Medicaid Planning into Your Practice
Planning Trends and Incorporating Medicaid Planning into Your Practice
Presented by Aaron Kempen
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