Can a Medicaid Annuity be the Answer?
In today's USA Today, Matt Kranz answers a question about asset protection:
Q: My father may be put into a nursing home and would like to protect his investments, including his home and $250,000 in cash and stocks. Is there a way to do this?
Matt's first point is a good one, "In hindsight, the best thing to have done would have been to start planning farther ahead. " However, the reality is that most families don't see the need for or value in asset protection planning until the crisis is upon them. Then families ask the question posed above.
So what is to be done in this situation? One solution Matt speaks about is combining a gift and a "Medicaid Annuity". I have detailed the concept below. The problem? While Medicaid Annuity planning may be effective in California, it is of very limited used her in New Jersey. In the recent case of N.M. v. Div. of Med. Assistance & Health Services the court found that New Jersey may consider as a countable resource the value of the income stream from a "Medicaid Annuity" purchased by a community spouse. An excellent summary of the case can be found on Don Vanarelli's blog.
If a Medicaid Annuity worked in New Jersey for asset protection planning, this is what it might be structured as:
Otherwise, [Michael Gilfix of elder law specialists firm Gilfix & La Poll Associates of Palo Alto, Calif.] [suggests your father might consider trying to protect some assets by using a combination of an annuity and gifts. Let's assume the cost of a nursing home is $5,000 a month and your father's monthly income is $1,000 including Social Security. With the $250,000 cash in the estate, your father might give a gift of $125,000 to a relative. That exceeds the $13,000 annual exclusion for gifts. However, your father could avoid gift tax on the $125,000 by claiming $112,000 of his $1 million lifetime gift tax exclusion, Gilfix says. He would need to file a 709 gift tax return with the IRS.
The $125,000 gift would make your dad ineligible for Medicaid reimbursement for 22 months, Gilfix estimates. So, with the remaining $125,000 in the estate, your father could buy an annuity with a 22-month term so it pays $4,000 a month.
Your father would qualify for Medicaid, since there would be no assets in the estate. And the annuity would cover the cost of the nursing home for 22 months. After that time, your father would qualify for Medicaid. Meanwhile, the $125,000 gift would be protected, Gilfix says.
