Ohio Rules Govern How Annuities Are Treated for Medicaid Purposes

A friend suggested that I buy an annuity. What, exactly, is that?

An annuity is an insurance product. To buy one, you pay a lump sum to the insurance company, and your lump sum is later paid back to you, with interest, in smaller payments, as a steady income stream over an agreed upon number of years. You can defer this stream of payments (called a deferred annuity).

How are annuities treated in the Medicaid process?

Ohio has very specific rules about how annuities are treated for Medicaid eligibility. To qualify for benefits, accumulated resources and monthly income are examined separately. Each must be below certain levels. If you or your spouse applies for Medicaid and either of you owns deferred annuities, then those annuities will be treated as available resources, just like money in a bank account. If your annuities are in “Payout” status (called immediate annuities), they will be treated as income (not as resources).

What type of annuity can I purchase if my spouse already lives in a nursing home?

You may buy an annuity, but it must comply with Ohio’s rules (OAC § 5160: 1-3-05.3) if purchased within five years of a Medicaid application. The annuity must list the state of Ohio as a “residual beneficiary” (after a spouse or child) to the extent of Medicaid benefits the owner of the annuity received in case the annuity payments continue for a while after the owner’s death. The annuity you buy also must be irrevocable (meaning it cannot be cancelled), non-assignable (meaning it cannot be given to someone else), and it must be “actuarially sound.” To be actuarially sound, the annuity must pay out over a period of time equal to or less than your life expectancy or that of your spouse (as determined by the IRS life expectancy table). The annuity must pay out in equal monthly payments (without any balloon payments) and you may not defer the beginning date of payments. Finally, you must buy the annuity from a commercial source and not from an insurance company (no “private” annuities). You should consult an attorney for help in complying with these rules.

A friend suggested I buy an annuity as part of a “Medicaid Plan.” What are the advantages of doing this?

Often, the purpose of an annuity as part of a “Medicaid Plan” is to create income for the spouse who continues to live after the nursing home resident’s death. Also, buying an annuity that conforms to Ohio’s rules will reduce your (or your spouse’s) available resources for Medicaid purposes, which will accelerate your Medicaid eligibility. However, check with an attorney about the status of the rules and related lawsuits.

Can the government take back my annuity payments as part of Medicaid estate recovery after I die?

Yes, to the extent that you received Medicaid benefits, the government would take back any remaining annuity payments from your estate to cover the Medicaid benefits you received.

When I buy an annuity, can I ask for a year’s certain guarantee in the monthly payments?

Yes, but the annuity must still be actuarially sound to comply with Ohio’s Medicaid law. This means that the guaranteed number of payments cannot exceed your life expectancy, according to the IRS life expectancy table.

Can I buy a joint life annuity payable for my life as well as for the life of my spouse, who is currently a nursing home resident?

Yes, but the guaranteed payout cannot exceed your life expectancy or your spouse’s.

If I buy an annuity today, can I still qualify for Medicaid benefits in a couple of years?

Any annuity you buy within five years of your Medicaid application date will be examined to be sure it complies with the rules. Any non-compliant annuity purchased within five years would be considered an “improper transfer.” An improper transfer would result in a “transfer penalty,” which effectively means that you would not receive nursing home benefits for a period of time. The length of the penalty is calculated by dividing the amount improperly transferred by 6,327 (the current average private pay rate in Ohio is $6,327 per month).

How can I decide whether or not to buy an annuity for Medicaid purposes?

Annuities are effective in the right circumstances. However, using annuities as a Medicaid strategy is a complex and risky decisions and has led to many lawsuits in Ohio. Do not purchase an annuity for Medicaid purposes without first consulting competent legal counsel.

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    Mark Reckman has been with Wood + Lamping since 1979 and has served as the head of the Real Estate and Probate Practice Areas as well as managing partner of the firm.

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