In a married couple Medicaid planning scenario, it is common for the community spouse (CS) to purchase an annuity. This annuity is purchased in order to spend-down excess assets and enable his or her spouse to qualify for Medicaid benefits. With this type of annuity, the primary beneficiary designation is most often: The State Medicaid Department, to the extent of medical assistance benefits provided on behalf of the institutionalized spouse (IS).

As the owner of the annuity, the Community Spouse will receive the annuity payments until one of two things happens:

1. the contract has made all of its payments and is complete, or

2. the CS passes away.

This means that if the IS passes first (which would be expected, as that spouse resides in the nursing home, while the CS remains in the community), the CS will continue receiving payments, and not until after the CS passes will the State Medicaid Department be entitled to collect benefits paid from any remaining annuity balance.

What If The Community Spouse Predeceases The Institutionalized Spouse?

When the CS passes away, as the annuity owner, the claim should end and the remaining annuity balance then goes to the primary beneficiary – in this case – the State Medicaid Department. Any balance left, after Medicaid is repaid, would pass to the secondary (contingent) beneficiary.

However,  when the CS passes while the IS is still alive and receiving care, the Medicaid Department will sometimes refuse to release the amount of the Medicaid claim to the insurance company until after the IS passes. This means that the claim remains open, and continues to increase as the IS is still receiving care. The state continues to receive the monthly annuity payments from the residual balance until eventually there is nothing left for contingent beneficiaries. We have seen this happen in several states – Arizona, Arkansas, Iowa, Nebraska, and Virginia.

We Have Seen A Couple Approaches to Prevent This:

1. In order to preclude the Medicaid agency from allowing a claim balance to continue growing, several elder law attorneys include additional language to the standard beneficiary designation of a Medicaid Compliant Annuity owned by a CS: “The primary beneficiary’s claim amount ends on the death of the owner.” This language is designed to prevent the state’s claim amount from continuing to run past the date of the death of the CS.

2. As you may recall, there was Hutcherson vs. Arizona Health Care Cost Containment System Administration, wherein it was decided that it was a state’s right to be able to continue the claim past the date of the death of the CS. To avoid the above in its entirety, one attorney in Arizona has his clients sign a “Directed Beneficiary Designation” amendment to supplement their Medicaid Compliant Annuity applications. The amendment states:

As the proposed annuitant, I direct [the insurance company] that the stated beneficiaries listed in my annuity application and contract, primary or otherwise, receive their respective payments as a commutation.

With the beneficiaries being required to take a lump sum commuted value, rather than continuing the monthly payments, there is no opportunity for the institutionalized individual’s claim amount to continue to accumulate.

As you can see, Medicaid planning is as complicated as it is simple. In addition to the state rules and financial circumstances of your client(s), it is also important to consider their relative health and anticipated longevity. Although the future is never certain, taking all factors into consideration, along with their potential outcomes, is the best way to ensure you’ve put together the most appropriate plan for your client(s).