Generally speaking, after the Deficit Reduction Act of 2005, if a community spouse uses a Medicaid Compliant Annuity, or promissory note, to eliminate the spend-down amount an institutionalized spouse is immediately eligible for Medicaid benefits. After the purchase, if the community spouse's income is less than his or her monthly maintenance needs allowance the shortfall would be shifted from his or her institutionalized spouse's income prior to determining the Medicaid co-pay. Thus, maximizing the term of the annuity to the full extent of the community spouse's Medicaid life expectancy results in an income planning opportunity. The only downside of a maximized stretch is that if the community spouse predeceases the term, leaving an opportunity for the state Medicaid agency to recover from the residual benefits.
For example, assume that Alice resides in the community, and her husband Roger is in a nursing home. The monthly private pay rate for Roger's care is $6,500, while his monthly income is only $1,500. With a Medicaid per diem rate of $150, Roger's facility receives approximately $4,562 per month for a Medicaid resident.
With Alice being 77 years of age she knows that her Medicaid life expectancy is 11.26 years/135 months. If she eliminates their $226,000 spend-down amount by purchasing a Medicaid Compliant Annuity she would receive $1,724 per month for 135 months. The total pay-out is $232,740. With Alice having a monthly maintenance needs allowance of $2,841, and monthly income of $2,224, Alice has a monthly income shortfall of $617. With that amount being shifted from Roger's monthly income, less his $35 monthly personal needs allowance, his Medicaid co-pay is $848. For each month that Roger is on Medicaid benefits, his Medicaid claim amount increases by $3,714. The $3,714 consists of the Medicaid rate of $4,562 being reduced by Roger's monthly co-pay of $848.
If Roger dies after receiving 38 months of Medicaid benefits the Medicaid claim amount is fixed at $141,132. If Alice dies 24 months later, 73 monthly payments still remain in the Medicaid Compliant Annuity - residual balance of $125,857.11.
To protect against such a result, at the commencement of the plan Alice could have purchased a term life insurance policy with a face value of $130,000. The policy would have had an annual cost of approximately $4,034.60 - assuming a standard rating. With a preferred rating, the annual cost of the policy would have been much less. Nonetheless, without any question the policy would have reinsured against a risk of a Medicaid claim.
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