Not So Fast On Medicaid Qualification Annuities

Mr. Lefebvre called.  His wife had just been admitted to an Alzheimer’s care facility.  The nursing home had referred him to an attorney specializing in Medicaid qualification.  The Medicaid attorney was advising Mr. Lefebvre to sell the couple’s investments to qualify Mrs. Lefebvre’s nursing home care for Medicaid coverage.

Mr. Lefebvre was retired.  He had spent his career as a dry cleaner.  He and his wife had $500,000 in stocks, which they had owned for a long time, and a condominium.

Medicaid qualification is determined at the time application is made for it.  The eligibility qualifications for Medicaid coverage of long-term nursing care in Michigan are as follows:

  1. Residency and citizenship. The applicant must be a U.S. citizen or have proper immigration status, and be a resident of the State of Michigan.
  2. Age/disability. The applicant must be age 65 or older, or blind, or disabled. The applicant must meet certain medical requirements consistent with the level of care requested.
  3. Income limitations. The applicant spouse is allowed income $60 per month for personal expenses. In the case of a husband-wife “community,” in which one of them (“applicant spouse”) is applying for Medicaid nursing home coverage and the other (“community spouse”) is not, the applicant spouse’s income may be attributed to the community spouse to the extent the community spouse’s income is less than $1,966 per month.  If the applicant spouse demonstrates high shelter (rent, utilities, etc.) of the community spouse, then more than $1,966 of the applicant spouse’s income may be attributed to the community spouse, but in no event may more than $2,981 of the applicant spouse’s income be attributed to the community spouse. If the applicant spouse’s income exceeds the amount allowed for personal expenses, and any amount attributed to the community spouse, he or she may qualify for Medicaid coverage of nursing home care, but the excess income must be paid down against the cost of such care.
  4. Asset limitations. Exempt assets include up to $2,000 in cash or securities; an interest in a residence with equity up to $560,000, provided the residence is occupied by the community spouse; and an interest in a burial space and pre-need funeral contract valued at up to $11,072.  Non-exempt assets are “countable” assets.  In the case of a husband-wife community, if countable assets are $43,824 or less, the protected amount is $21,912; if countable assets are greater than $43,824 but less than $219,120, the protected amount is one-half of the countable assets; if countable assets exceed $219,120, the protected amount is $109,560.  Countable assets in excess of the protected amount must be spent-down on nursing home care for the applicant spouse before such care qualifies for Medicaid coverage.

Giving away assets is not an effective strategy to qualify an individual for Medicaid.  For Medicaid qualification purposes, an individual is deemed to own interests in property for five years after giving them away.

A popular strategy has spouses liquidate their nonexempt assets, and purchase a Medicaid-qualifying annuity with the proceeds.  Such an annuity provides an income to the community spouse for his or her life.   The annuity provides a death benefit if the community spouse dies without attaining his or her actuarial life expectance as of the time of purchase of the annuity.  The annuity is noncancelable and nonrefundable.    In McCarthy v. Hughes, 734 F.3d 473 (6th Cir. 2013), the U.S. Court of Appeals for the Sixth Circuit confirmed that such an annuity is an exempt asset for purposes of qualifying the applicant spouse for Medicaid.

At the Lefebvre’s condominium I was greeted by their daughter, who was visiting from out of town with her husband.    Her husband was in the other room on the phone with a stockbroker selling the Lefebvre’s investment portfolio.  He had been through a similar situation with one of his parents.

Medicaid qualification is a cottage industry in Michigan (and perhaps elsewhere).   Mr. Lefebvre had paid the Medicaid qualification lawyer a $7,500 retainer, which was at least twice what they would have paid for a traditional (non-Medicaid-qualifying) estate plan.  The lawyer had been engaged in Medicaid qualification practice full-time for six years.

The Lafebvres’ daughter said that they were looking for me to reassure them about advice given to them by a Medicaid qualification lawyer.   But it was too late.  The decision to seek Medicaid qualification had already been made.

Mrs. Lefebvre died a few weeks later.  At her funeral, it occurred to me what a disservice had been done to these people.  Assuming that the Lefebvre’s blue-chip stock portfolio had a cost basis of $100,000, selling it for $500,000 would have generated a $400,000 capital gain, and an $80,000 income tax liability under the 20% capital gain tax rate prevailing at the time.   After paying the $80,000 in capital gain tax, $22,000 for pre-need funeral and burial contracts for the spouses, and $7,500 was paid to the Medicaid qualification lawyer, $391,500 would have remained to purchase a Medicaid qualification annuity for Mr. Lefebvre.  Assuming that Mr. Lefebvre’s actuarial life expectancy was 9 years, $391,500 would have purchased him an non-cancellable annuity paying him $4,323 per month for the rest of his life.

Had the Medicaid annuity not been purchased, and Mr. Lefebvre retained the investment portfolio to his death, the cost basis of the portfolio would have stepped-up to fair market value at his death.  In other words, there would be little if any income tax on sale of the investments shortly after Mr. Lefebvre’s death.  Thus, the Lefebvres needlessly incurred $80,000 in capital gain tax on sale of the portfolio to purchase the Medicaid annuity.

Apparently the Lefebvres’ Medicaid qualification attorney failed to ask Mrs. Lefebvre’s physician how long she was expected to live.  How many people have you known of who lasted a year in a nursing home?  Two years?

Liquidating a couple’s nonexempt assets to purchase a Medicaid qualification annuity is indeed a dubious strategy.

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Stephen J. Dunn

Tax and Estate Planning Attorney and Author