The Medicaid SPIA: Tax Favored Income With A Purpose

by John L. Becker, Jr., Cheif Marketing Officer, Jackson Brokerage Corp.

Even the most seasoned certified financial planner will balk when a senior client asks for direction through the confusing maze of overlapping federal and state regulations on Medicaid’s participation in funding long-term care and how annuities fit into the equation. Please consider (as I have in my more than 20-year career) the complexities involved in the following line of questioning.

Do most seniors rely on Medicaid to pick up the costs for long term care? Is Medicaid support for long-term care only available to the truly indigent members of our senior society? How much income can I have or retain in order to still obtain some Medicaid assistance with my long-term care expenses? What are the rules regarding married couples (both income and asset caps) where only one spouse is institutionalized? What are the rules regarding married couples (both income and asset caps) where both are institutionalized? Is there any way to maximize Medicaid assistance without entirely decimating the future estate for the beneficiaries?

Before continuing this article, let me put forth some necessary disclaimers. The commingled federal and state regulations involving Medicaid funding for long-term care expenses are expansive, highly interpretive, state-specific and not so understandably confusing. Therefore, I strongly recommend that any Medicaid planning involve the services of a local Elder Law Attorney for opinion and review. It’s no big deal to get an informed sign off before advising the client. That said, the scope of this article includes a working overview of the general regulations imposed upon the Medicaid applicant seeking assistance with long-term care expenses and one specific remedy to the problems that applicants may experience. That remedy – the Medicaid SPIA – can have very beneficial ramifications for both the senior seeking Medicaid assistance and the ultimate beneficiaries of the estate.

Long Term Care/ Nursing Home Challenges

Today’s seniors represent the wealthiest generation in the history of the world. They continue to live better (and longer) than their ancestors. This ever-increasing longevity due to continuous medical advances greatly magnifies the chances that someday most seniors will be in need of long-term care. Also, those comfortable nest eggs that were positioned to provide for care for your parents in their 70’s may be almost gone by their 80’s, 90’s and beyond.

What about long-term care insurance? I certainly would encourage all planners to vigorously market this coverage to seniors while they are still healthy. However, as of this writing only 6% of the total long term care costs are paid for by private insurance. This points out that the product is still young in its life cycle, still very under exposed by all of us and has unique underwriting challenges and commensurate pricing questions that are still holding it back. Some of the horses are out of the barn.

That is why the safety net that is Medicaid will ultimately protect the middle class and the poor alike as the closing years of senior life are exponentially increased. As recently as 1997, 68% of all nursing home residents were at least partially dependant on Medicaid to fund their care. That percentage will surely increase in the years to come.

To review, there are four primary sources to support long term care expenses: individual assets, family income, private insurance and Medicaid. To senior clients who have earned well and saved prudently thus generating a substantial fixed asset base to adequately absorb variable care costs that increase every year of a life expectancy that increases every year, I commend them. To senior clients who have sired children who have become both financially successful and generationally responsible, I commend both the parents and the siblings. For that lucky 6% who have anticipated the need and mitigated the risk by purchasing a well-constructed insurance policy for long-term care, I commend the senior and their planner.

You have more than $2000 in assets and/or more than $500 a month in income and make no mistake about it – "You are not wealthy!" As a matter of fact at an average nursing home cost in the neighborhood of $60,000 per year, your assets would most probably be totally depleted to pay for your care as that care persisted. So, you have some assets but at the same time you have a very real and growing need for Medicaid assistance to complete the anticipated but unknown costs of your long-term care. At the same time, if possible, you would like to maximize Medicaid assistance while preserving some portion of your small estate for your heirs. Folks, this is a profile that is a very, very common one among Medicaid applicants seeking assistance with long-term care expenses. They need a hedge. They have a need to maximize Medicaid assistance while maintaining the financial integrity of their estate – if only for the intermediate term. The intermediate term normally will eclipse their life span.

Again, in general reference, individuals seeking Medicaid assistance must not exceed a certain amount of income and a certain amount of assets. The term "countable" assets/income was popularized in federal terms regarding Supplemental Security Income (SSI) limits. As of 2001, these caps were set for individuals at $530 per month and $2000 in total assets. The terminology is important and with the right planning and the assistance of an Elder Law Attorney the client and beneficiary can establish the necessary balance to establish a Medicaid friendly estate. There are some gray areas. Indeed this federal financial eligibility criteria is established separately at the statewide level as well and this criteria varies on a state-by-state basis. Also, Congress has erected more liberal caps for nursing home residents whose spouses co-reside in the community. In the state of Florida, for a specific example, the countable asset limit for a qualified couple where one spouse is institutionalized is $87,000 (1/01/01). Therefore, a balanced strategy of staying under the caps (both federal and state) is a necessary initial requisite to qualify for Medicaid assistance.

A new generation of products have been developed to balance countable assets and income while preserving an estate for heirs. First, it is a purposeful strategy to accentuate, magnify and transfer assets to certain "non-countable" assets. In Florida, for example, non-countable inclusions are home and land and one car (no value limits); term life insurance policies; cash value life insurance (up to $2500. death benefit or face value); most qualified funds; $2000 cash/cash equivalents; income producing property or an annuity, in the payout phase (SPIA). This list is not all inclusive but a prudent planner can readily perceive the many advantages of repositioning assets and controlling income for the nursing home resident that applies for Medicaid assistance. The direction of that conversion – from countable assets to certain tangible and certain income producing assets - should take place prior to an application for Medicaid.

Let’s consider the management of income as well. For married couples, there are limits placed on the income of the institutionalized spouse but none on the community spouse. Therefore, income can and should be re-directed from the institutionalized spouse to the community spouse since all income payable to the institutionalized spouse will be assigned to nursing home costs. The goal curiously is to then slow down the income stream and therefore the erosion of income for the Medicaid candidate. Each state has a different income test, which again mandates the guidance from an Elder Law Attorney.

Please permit me to be more succinct as to the strategy, which ushers in the need for the Medicaid SPIA. First, we want to convert countable assets to non-countable assets (i.e. SPIA) to garner an approval from Medicaid by remaining under the countable asset cap. Remember, all SPIA’s are not Medicaid friendly. The SPIA contract has a balloon provision, is irrevocable and non-assignable and non-commutable only to the beneficiaries. The immediate annuity income stream should be held as minimal (thereby protecting all or most of the initial principal) and the income period must be equal to or less than the client’s life expectancy. The implied benefit, which cannot be overlooked, is that the balloon payment will very likely be made to a surviving spouse or heir of the institutionalized senior without the requisite erosion from the long-term care experience.

Specific Case Studies

These are two real people whose financial profile was drastically changed for the better through the utilization of the Medicaid SPIA. Neither were wealthy. Both had a need that was evident.

Case 1. An 85-year-old widow was currently spending $5,200 per month and had depleted her money market account down to $120,000. Her two daughters went to her financial planner realizing that within two years she would be out of money and out of the nursing home. He enlisted the services of an Elder Law Attorney to reposition to an SPIA and apply for Medicaid.

They transferred the $120,000 into a 6.5/year Medicaid Annuity (i.e. the 85 year old’s life expectancy was 6.63 years). The monthly SPIA income was paid to the nursing home at minimal interest plus $10 (acceptable to Medicaid in most states). The income was set at $ 321.51 and the remaining costs were paid to the nursing home by Medicaid. Upon the 85 year old’s death, the principal sum of $120,000 has now been nearly entirely preserved for her daughters. It is very important to note that the vast majority of institutionalized seniors will expire while institutionalized sometime during their calculated life expectancy at the time the Medicaid SPIA was established.

Case 2. A 96-year-old woman had only $42,000 left in cash and had a predicted life expectancy of only 37 months. She was living only on a day-to-day basis but could indeed exhaust her remaining liquid assets in favor of long term care within only a few months thereby making a hurried application to Medicaid imminent. The planner and Elder Law Attorney transferred the cash to the Medicaid SPIA yielding only $45.90 a month for 36 months with a $41,690 payment in the 37th month. Medicaid picked up the short fall and her three children will receive the balloon payment or period certain income of her repositioned cash from an "A" rated insurance carrier when she dies. Planning can never be regarded as too little…or too late.

Summary

There are many updated solutions to the problems of providing health care costs that do not necessarily involve idly standing by and waiting until the senior utilized all of their money and then Medicaid comes to the rescue. Medicaid SPIA’s can help, especially when both spouses are alive and more liberal treatment can be given to the surviving spouse. Always check with an Elder Law Attorney to guarantee state applicability or call CDA to better navigate the regulating maze. For example, a few states do not even permit balloon payment annuities, but do offer the period certain SPIA option. If it is possible to provide for Medicaid assistance while simultaneously preserving an estate and minimizing the erosion of a senior’s assets, the planner must investigate all the options, involve the right carrier, attorney and SPIA and inform the client…as soon as possible. That’s our job. Right?

John L. Becker, Jr. is the Executive Vice President and Chief Marketing Officer for CDA of America, Inc. a nationally recognized consultative resource for the life insurance industry. CDA has participated in the actuarial design for a number of Medicaid SPIA’s and has also unionized a network of Elder Law Attorneys for deployment throughout the nation. Mr. Becker can be contacted at Jackson Brokerage Corp., 409 E. Cook St., Suite 120, Fort Wayne, IN 46825 (260) 490-4233 or (866) 490-4233 FAX (260) 490-4203.