By Dale Krause
Planning for long-term care has become a paramount issue for estate planning and elder law practitioners. The high cost of long-term care can pose a serious threat to clients’ financial well-being as they age beyond retirement. Those clients who do not have the proper mechanisms in place to minimize the financial impact of long-term care are truly at risk of losing everything. However, practitioners can provide a solution, even if the client is already in a nursing home.
Medicaid, known as MassHealth, is a joint state and federal program meant to provide financial assistance for medical care to those in need. Concerning long-term care, MassHealth will cover a person’s stay in a nursing home (or another approved facility) including room and board, pharmacy expenses, and incidentals. This makes qualifying for MassHealth desirable to individuals who, whether through error or omission, did not plan for a long-term care event.
To qualify for benefits, an individual must meet specific non-financial and financial requirements. While there is a myriad of criteria one must meet, the biggest hurdle often relates to the amount of assets an institutionalized individual and their spouse own. Generally speaking, as of January 1, 2023, an institutionalized individual may own up to $2,000 in countable assets while a spouse at home (the “community spouse”) may retain up to $148,620 in countable assets. Countable assets include bank accounts, investments, IRAs (including 401k accounts and Roth IRAs), cash value insurance policies, and property other than the primary residence.
Based on these limitations, most individuals do not automatically qualify for benefits. Countable assets that exceed the applicable limit must be “spent down” for the person to qualify for benefits. Eliminating these assets is a way to accelerate an individual’s eligibility without them first having to exhaust their assets on the nursing home bill. In many cases, this can be accomplished by certain asset preservation strategies including paying off a mortgage or other debts or purchasing or improving exempt assets. The use of such strategies is known as emergency MassHealth planning and is a practice area that is growing in popularity.
MassHealth Compliant Annuity and IRAs
In addition to the aforementioned common spend-down strategies used in emergency planning, those pursuing eligibility may also use tools to convert excess assets into income, often by way of a MassHealth Compliant Annuity (“MCA”). An MCA is a single premium immediate annuity whereby the institutionalized individual or the community spouse establishes a contract with an insurance company that provides regular payments in exchange for a lump sum premium.
An MCA must comply with the Deficit Reduction Act of 2005. The annuity contract must be irrevocable and non-assignable, provide equal monthly payments, have a term that is equal to or less than the owner’s MassHealth life expectancy, and, with some exceptions, designate the MassHealth agency as the primary or contingent death beneficiary. Most importantly, an MCA can be funded with an IRA.
The benefit of funding an MCA with an IRA is the avoidance of tax consequences associated with liquidating the IRA. Rather than creating a taxable event through liquidation, the funds may be transferred, tax-free, to the annuity. The funds are then taxed as payments are disbursed over the term of the annuity. All payments received within a calendar year will be taxable to the owner. This allows the owner to eliminate the IRA as an asset for MassHealth purposes, spread the tax liability over several years, and accelerate their eligibility for benefits.
How it Works
The basic concept surrounding MCA planning is simple: transfer the excess assets into the annuity to qualify for benefits. When funding MCAs with IRAs, there are several factors to be considered: ownership of the account, the health status of the applicant, and, in the case of a married couple, the health of the community spouse.
Where the community spouse owns the IRA, the strategy is straightforward. The IRA is transferred to an MCA, and the asset is eliminated for countability purposes. The owner has flexibility with respect to the term of the MCA, although, as previously noted, the annuity term must be equal to or less than the owner’s Medicaid life expectancy. The goal is to choose an annuity term that is long enough for the community spouse to reap the economic benefits of the strategy, but short enough that they will likely outlive the annuity term to avoid MassHealth recovering the balance as primary beneficiary. There is no right or wrong answer when trying to determine the appropriate annuity term for a community spouse. Unexpected death or illness can derail any plan for MassHealth eligibility. It is also important to reiterate that the term of the annuity and the schedule of payments cannot be changed or accelerated. Therefore, it is essential that practitioners be diligent in explaining the possible effects of using a shorter or longer term and how those effects translate into economic consequences.
There are additional challenges to consider when the institutionalized spouse owns the IRA. Since ownership of the IRA cannot be changed without incurring immediate tax consequences, the IRA cannot be transferred to the community spouse and must be structured in the name of the institutionalized spouse , who will be the owner of the MCA and the recipient of its income.
The biggest concern under these circumstances is the MCA income becoming part of the institutionalized spouse’s MassHealth co-pay. When an individual qualifies for MassHealth, their monthly income often goes toward the nursing home. There are, however, certain deductions allocated to the individual before the remaining income is paid to the nursing home. These deductions include a $72.80 Personal Needs Allowance, certain medical expenses such as insurance premiums, and any applicable shift in income owed to the community spouse under the Monthly Maintenance Needs Allowance regulations. Thus, while an institutionalized individual’s income does not automatically go to the nursing home, increasing that individual’s income by way of the annuity could result in a larger MassHealth co-pay depending on their allowable deductions.
Whereas choosing the appropriate annuity term for the community spouse is subjective, choosing one for the institutionalized spouse is clear: go long. Unless the community spouse is in very questionable health, the institutionalized spouse will likely predecease the community spouse. Therefore, the couple should reduce the amount of income the MCA produces by choosing a longer annuity term, not to exceed the owner’s MassHealth life expectancy. The payments will continue being disbursed to the institutionalized spouse during their lifetime. Upon their passing, the community spouse will assume control of the funds as the primary beneficiary of the annuity.
When is an MCA not the Right Fit?
Although MCAs are useful vehicles to protect assets, their use may not always be appropriate. For example, when dealing with an IRA of small value, it may make more sense to liquidate the funds and transfer the net proceeds to the community spouse, as this is typically faster than transferring the funds to an MCA. In that situation, the consequences of liquidating the funds may be offset by medical expense deductions for income tax purposes when filing that year’s tax returns. If the tax consequences would be minimal, the timing factor for MassHealth eligibility may be more important than keeping the IRA intact, given the high average monthly cost of the nursing home.
With more seniors in need of nursing home care and the majority of those individuals unprepared for the high cost of care, it is more likely than ever that estate planning and elder law attorneys, as well as attorneys of any practice area, will encounter a client that has entered a long-term care facility and is at risk of losing their life savings. The important thing to remember is they do not have to deplete their money paying the nursing home. More specifically, they do not have to liquidate their IRA to pay for care. Other options are available.
Dale Krause, J.D., LL.M. is the President and CEO of Krause Financial Services—a firm that specializes in assets preservation solutions, education, and resources for long-term care, including Medicaid Compliant Annuities, Long-Term Care Insurance, and more.