What if my Client Already Owns an Annuity?

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Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.


Annuities are one of the most popular investment vehicles available. Many clients though, will own old annuities that are non-DRA compliant and will likely prevent them from qualifying for Medicaid.

If the annuity does not meet the requirements as outlined in the Deficit Reduction Act of 2005, which requires that an annuity must be irrevocable, non-assignable, actuarially sound, make equal payments, and name the state as the beneficiary – the client could be ineligible for Medicaid.

Tax-Deferred Annuity

If your client has a tax-deferred annuity, they do have options to help them spend down. They can liquidate the account or transfer the annuity.

Liquidating the Account

If your client chooses to liquidate their account, they may be subject to a surrender charge and the deferred gain will be taxable in the year they receive the funds. However, having liquid assets will allow your client to spend down to become Medicaid eligible. They can use these assets to improve exempt assets like the community spouse’s home or vehicle or they can fund a Medicaid Compliant Annuity.

Transferring the Annuity

The other option, transferring the annuity to a Medicaid Compliant Annuity (MCA), would allow your client to avoid the immediate tax consequences of liquidating the account. Rather, the gain is taxed as payments are made over the term of the MCA. Your client would proceed with a Section 1035 Tax-Free Exchange where they can move the assets in one annuity, to another. Your client will need to fill out paperwork and then the insurance company will obtain the funds directly from your current custodian.

Then, if the new annuity funded is an MCA, that money will only count as income for your client and can help them spend down to become Medicaid eligible.

Immediate Annuity

If your client owns an immediate annuity, they may face a penalty period if the contract is considered a divestment. Or, the contract may be considered an available asset. However, if the contract meets the requirements of the DRA, it will only be considered income to the owner. The distinction between what the immediate annuity will be considered is critical.

If you encounter a client with a pre-existing annuity, we offer complimentary annuity valuation service. We will analyze your client’s preexisting annuity to determine whether it is Medicaid compliant, if it is not, we will perform a valuation process to determine its fair market value and sell it on the secondary market.  This allows your client to eliminate a tricky asset while also working toward Medicaid eligibility.

The entire process from valuation to change of ownership can typically be completed in as little as 1-3 weeks. If you would like to know more about this process, please contact our office.