Fitting Tax Planning and Immediate Annuities into Last-Minute Medicaid Planning
When applying for Medicaid for a spouse in Massachusetts, it is possible to preserve all assets for the community spouse (i.e., the at-home spouse). The general rule is that all of the assets of both spouses are considered available to pay for the institutionalized spouse’s care, and that the community spouse in 2010 can retain no more than $109,560. This rule can sometimes be overcome through a Medicaid appeal process if the community spouse’s income from pensions, immediate annuities and Social Security is less than the amount calculated for basic needs under a Medicaid formula that is indexed for inflation.
An immediate annuity can place a community spouse in a worse financial position than the Medicaid appeal process. In cases where the Medicaid appeal process would not preserve all assets, an immediate annuity can help do so, but the Medicaid appeal process is financially preferable because it can preserve not only all assets but also some or all of the institutionalized spouse’s income for the benefit of the community spouse. The payout period of the annuity cannot exceed Medicaid’s determination of the life expectancy of the community spouse. Under the annuity route, however, Medicaid eligibility is not effective until the date the annuity becomes irrevocable, so it is important that an elder law attorney make a determination of which is the better route as early in the planning process as possible.
For an unmarried person who is applying for Medicaid in Massachusetts, an immediate annuity can be used to stretch out the spenddown of excess assets, with any remaining payments upon the annuitant’s death being received by the beneficiaries. The payout period of the annuity cannot exceed Medicaid’s determination of the life expectancy of the annuitant, or else the annuity will be considered a disqualifying transfer. The annuity can be of a commercial or a private nature, but is subject to the Medicaid regulations and policies in effect at the time of the effective date of the annuitization, so it is important to have an elder law attorney involved before the annuity is initiated.
Payments for nursing home care can be treated as itemized medical deductions on the income tax returns of the person making the payment. Where appreciated assets are being sold to pay for nursing home care, capital gains should often be recognized with the offsetting medical expense deduction in mind.