The “Name on the Check Rule” is a Medicaid Compliant Annuity (MCA) strategy that involves a guideline used by Medicaid to determine who income belongs to. If the income is payable to a particular spouse, it is considered available only to that spouse. In other words, the income belongs to the person whose name is on the check.
In the context of MCA planning, this guideline can be used when dealing with an IRA owned by the institutionalized spouse. They can annuitize the IRA and make the income payable to the community spouse only. The institutionalized spouse is the owner and annuitant of the contract, and the community spouse is designated as the payee.
How Does the “Name on the Check Rule Strategy” Work?
With this strategy, the institutionalized spouse can avoid the immediate tax consequences of liquidating their IRA. Plus, naming the community spouse as the payee allows the institutionalized spouse to avoid increasing their income and, thus, increasing their Medicaid co-pay to the nursing home. This strategy also allows the couple to take advantage of the favorable beneficiary rules by naming the community spouse as the primary beneficiary. Although the community spouse receives the income from the annuity, the tax liability still belongs to the institutionalized spouse, as they are still the owner of the IRA.
If the institutionalized spouse owns a countable IRA, they may use the “Name on the Check Rule” to transfer the IRA to an MCA and designate the community spouse as payee.
“Name on the Check Rule” Considerations
- Full Medicaid life expectancy
Although not required for Medicaid compliance, using the full Medicaid life expectancy as the annuity term is the most conservative approach. We strongly recommend structuring the annuity this way when using the “Name on the Check Rule.”
- Income shift to the community spouse
If the MMNA rules trigger an income shift from the institutionalized spouse to the community spouse, using the “Name on the Check Rule” may not be necessary. In these cases, the institutionalized spouse may remain the payee of their IRA-MCA.
- Opting to receive paper checks
Paper checks made payable to the community spouse serve as additional evidence to the Medicaid caseworker that the income is for the community spouse only, so we recommend foregoing the direct deposit option for MCA payments and choosing paper checks instead.
- Value of the IRA
When dealing with a small-value IRA, liquidating the account and transferring the net proceeds to the community spouse may be more practical. The tax consequences of liquidating the funds may be offset by medical expense deductions when filing taxes that year.
Make sure you consult a tax expert before liquidating your client’s IRA or transferring it to a Medicaid Compliant Annuity.
While the “Name on the Check Rule” is a great option for most clients, its success varies by state. For the latest information on the viability of this or any MCA strategy in your state, contact our office directly.