Tax strategies and Medicaid planning goals often conflict. As an example, imagine a single person who requires nursing home care and their main asset is an individual retirement account (“IRA”). In order to qualify for Medicaid this person will need to liquidate the IRA because of the $2,000 asset limit to be eligible for Medicaid benefits. But cashing out the IRA is going to come with income tax consequences. Depending on the size of the IRA it might make sense to look at a new option available in Medicaid planning.
Medicaid policy allows a Medicaid applicant to convert the IRA into an income stream by purchasing an annuity. The annuity does not have to meet the requirements that a community spouse (the spouse of the person applying for benefits) who is setting up an annuity with their own assets would have to meet. This annuity does not have to be irrevocable, actuarially sound, nor paid out in equal monthly payments. However, the required minimum distributions associated with the IRA would have to be paid out annually.
Although this might make sense for some people it is uncertain whether the income can then be assigned to a spouse or a disabled child. If not, the income may be part of the applicant’s patient pay amount, the amount that the benefit recipient has to pay out of their income each month to the care facility.
An even more pressing question is whether the annuity has to name the State of Michigan as a beneficiary. In certain situations Medicaid policy requires that the state be named to receive any money remaining in the annuity after the annuity owner passes away. This would mean that the state would receive the payout up to the amount of benefits that it has paid on behalf of the annuity owner – something most people plan to avoid.
It is very important to speak with an attorney that practices elder law to explore the various options available when your or a loved one needs costly care.