Planning for an Individual with No Longevity

Feb. 7, 2013 - PRLog -- The goal in planning for an institutionalized individual with diminished longevity is to allow the individual to immediately qualify for Medicaid, while reducing the reimbursement claim to the Medicaid program and creating the greatest possible wealth transfer upon death.  Please note that this technique is traditionally advised if the nursing home resident is expected to pass within 12 months.

Fact Pattern

Carol, a widow, is 85 years of age and is a permanent resident of a nursing home in the Midwest.  Carol has an anticipated longevity of only 12 months due to advanced cancer.  With countable resources of $136,900 she has a spend-down amount of $134,900.  This amount was determined by subtracting Carol's individual resource allowance of $2,000 from her countable resources.  Additionally, with the nursing home charging $6,100 per month for her care, and with her monthly income being only $1,050 from social security and pension, she has a monthly income shortfall of $5,050.  Carol would like to preserve as much as possible for her children and grandchildren.  The Medicaid rate of the facility is $4,500.

Medicaid Compliant Annuity

Carol purchases a Medicaid Compliant Annuity with a period certain of 81 months1.  With an investment amount of $134,900 the Medicaid Compliant Annuity would pay Carol $1,722.70 per month.  The total payout of the Medicaid Compliant Annuity will equal $139,538.70.

Compliance with DRA

With Carol's annuity returning more than she had invested within her Medicaid life expectancy, and with the annuity naming the state Medicaid agency as the primary beneficiary to the extent of benefits provided, Carol's annuity is deemed actuarially sound and meets all of the requirements of DRA.

Medicaid Application

Immediately following the purchase of the Medicaid Compliant Annuity Carol would apply for Medicaid benefits.  With the Medicaid Compliant Annuity converting Carol's lump-sum of countable resources into an income stream only she is immediately eligible for Medicaid benefits, and has a monthly copay of $2,742.702.

Medicaid Reimbursement Claim

Carol passes away in month 12 of her Medicaid Compliant Annuity payout.  With the monthly Medicaid rate of $4,500, less Carol's copay of $2,742.70, Medicaid paid $1,757.30 to the nursing home on Carol's behalf each month.  After 12 months of receiving Medicaid, Carol's Medicaid reimbursement claim amount equals $21,087.60.

Wealth Transfer

Carol had designated her children as the beneficiaries of her Medicaid Compliant Annuity, after the state Medicaid program.  With the Medicaid Compliant Annuity anticipated to provide a total payout of $139,538.70, less the 12 payments Carol had received, and the Medicaid reimbursement claim settled with the state, a wealth transfer of $97,778.70 was provided to the beneficiaries - Carol's children.

Interesting Points

   Had Carol opted to do zero planning, and simply continued to privately pay, her wealth transfer to her children would have been $74,3003.This is $23,478.70 less than the wealth transfer she made after purchasing the Medicaid Compliant Annuity.
   Carol was immediately eligible for Medicaid benefits.
   Carol realized a monthly savings of $1,600, in considering the private pay rate of $6,100 versus the Medicaid rate of $4,500.  
   Unless the annuity offers a cash commutation feature to the beneficiaries, the children will be forced to wait a total of 69 months in order to receive their entire inheritance - one payment each month.

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1 Utilizing the most recent life expectancy table published by the Chief Actuary of the Social Security Administration, an 85-year-old female has a life expectancy of 6.77 years/81.24 months.
2 The Medicaid copay was determined by combining Carol's social security income of $1,050 and annuity income of $1,722.70, less her personal needs allowance of $30.
3 This figure was determined by deducting the 12 months of care valued at $60,600 from Carol's spend-down amount of $134,900.  the 12 months of care was determined by multiplying Carol's monthly income shortfall of $5,050 by 12 months.