When implementing a Gifting/Annuity Plan for a client (refer to Option 3 in this blog to learn more about Gifting Plans), clients often question why there is a monthly income shortfall between the actual cost of care and their total income. The answer to this question has to do with the “otherwise eligible for Medicaid” criteria in order for a penalty period to commence.
The goal of a Gifting/Annuity Plan is to gift approximately half of the assets and use the remaining assets to purchase a Single Premium Immediate Annuity (SPIA) that contains Medicaid qualifying language (irrevocable, non-assignable, equal payments, etc.) to pay through a Medicaid ineligibility/penalty period – i.e. client is privately paying during this period.
The Deficit Reduction Act of 2005 implemented a 60-month look-back period for gifting/transferring assets and also stated that if assets are gifted during the 60-month look-back period, in order for an ineligibility/penalty period to start, the Medicaid applicant must be eligible for Medicaid but for the fact that the Medicaid applicant gifted assets. This means that if assets are gifted within the 60-month look-back period and we want Medicaid to start the penalty period, the Medicaid applicant must:
Have income less than his/her cost of care or allowable Medicaid expenses i.e. monthly income shortfall,
Have resources less than the allowable limit ($2,000 in most states), and
Submit a Medicaid application to start the penalty period.
If one of the three requirements outlined above are not met, Medicaid will not start the ineligibility period associated to the gift. As such, if we create more income by way of the annuity and the Medicaid applicant’s other income sources, Medicaid will not start the penalty period because the client has the means to pay for his/her own care. Therefore, it is my recommendation that we are conservative in the amount of income that is created from the annuity so that the penalty period starts without any issue and we achieve optimal results for our clients.