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  • Amber Hinds

Factors to Take into Consideration When Determining How Long to Structure A Community Spouse's MCA


In a married couple situation when one spouse is applying for Medicaid benefits and the other spouse remains at home in the community, one of the planning techniques used frequently to obtain immediate Medicaid eligibility for the Medicaid applicant is for the community spouse to purchase a Medicaid Compliant Annuity. By purchasing a Medicaid Compliant Annuity in the name of the community spouse, we’re able to convert countable resources into non-countable or exempt resources. In order for the annuity to meet the requirements outlined by the Deficit Reduction Act of 2005, the annuity must contain the following language:

1. Irrevocable

2. Non-assignable

3. Equal payments, with no deferral or balloon payments

4. Actuarially sound

5. State Medicaid agency named as beneficiary to the extent Medicaid benefits are provided

The last two requirements above are probably the most worrisome to clients. Many people think that the “actuarially sound” requirement means that the annuity must be structured over the annuity owner’s entire life expectancy[1]. In reality, the actuarially sound requirement means that the annuity must be structured no longer than the annuity owner’s life expectancy; however, the annuity may be shorter than the annuity owner’s life expectancy.

Furthermore, having to name the State Medicaid agency as a beneficiary is another worrisome item. If the community spouse is the annuity owner and the annuitant of the MCA, the State being named as beneficiary only comes into play if the community spouse predeceases the annuity term.

Some of the items to take into consideration when determining how long to structure the community spouse’s MCA are as follows:

The Health of Both Spouses

If you’re worried that the community spouse may pass quickly because he/she is not in good health, it may make sense to use a shorter annuity term. However, if the community spouse is healthy and you’re not worried about the state having a right to recover against the annuity, we can justify going with a longer annuity term.

Furthermore, with the community spouse being the annuity owner and annuitant – measuring life of the MCA, the beneficiary designation will only be triggered with the CS passes way. Therefore, you’ll want to consider how long you structure the CS’ MCA and the amount of income created. If the IS passes away shortly after the CS purchasing a MCA, will the community spouse have sufficient monthly income to live off of because the payment structure will not change based on the IS passing.

The Spend Down Amount

When structuring the MCA payout timeframe, we recommend creating a reasonable amount of monthly income. What exactly does that mean? Reasonable based on the geographic location of the clients, the cost of care amount, etc. For example, I wouldn’t recommend structuring a $500,000 MCA over the same timeframe as a $50,000 MCA. Why? Because although we can technically structure the MCA over a 2-month period to decrease the likelihood that the state will have the right to recover, it will likely raise unnecessary flags with the Medicaid office if the client has $250,000 a month in income.

Income

As you may know, the community spouse may have unlimited monthly income in all states (except two) without having to contribute his/her monthly income towards the institutionalized spouse’s monthly care costs.

However, if the CS does not have enough of his/her own monthly income to meet the Monthly Maintenance Needs Allowance (MMNA), he/she receives a portion of the IS’ income. If the goal is to shift income from the institutionalized spouse to the community spouse under the MMNA, you’ll want to consider how much income is being created under the MCA and whether the CS will still receive any of the IS’ income.

Speed the CS Needs the MCA Money Back

If the goal is to start planning for the community spouse as quickly as possible, then receiving the payments back from the MCA very quickly will be ideal. In most states, the community spouse can start making transfers/gifts immediately following the IS being eligible for Medicaid without affecting the IS’ eligibility.

Use of IRA/Pre-Tax Dollars to Purchase the MCA

If the MCA will be purchased with pre-tax/IRA funds, stretching the MCA over more than one tax year is ideal. For example, if a MCA is established in April 2020 and the annuity payout period is structured for 2 years with the first payment starting in May 2020 we’re able to spread out the tax consequences over 3 tax years – client will receive payments from the annuity in 2020, 2021, and 2022.

Alternatively, there isn’t a real benefit to structuring a tax-qualified MCA over such a short period of time that the annuitant will receive all of the money back in the same year. For example, if a tax-qualified MCA was purchased in April of 2020 and structured over 6 months with payments beginning in May of 2020, the annuitant will receive all of the payments back within one tax year. Therefore, in this case, the client could have simply liquidated the IRA, paid the taxes, and used post-tax to purchase the MCA.

While we realize this list may seem dauting, we’re here to help you with the specific details of each case.Call or email us with any questions.

[1] Three states (North Dakota, Oregon, & Washington) currently impose an actuarially sound requirement.

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