Co-authored by Joanna C. Feldman
Generally speaking, Medicaid rules require most of one’s monthly income be contributed toward the cost of one’s care in a nursing home. When the spouse of the Medicaid recipient remains at home, however, the impact of losing the other spouse’s additional income can be detrimental. The spouse at home (known as the community spouse), for example, may not receive substantial social security retirement benefits or a pension. To help deter what became known as “spousal impoverishment,” the law evolved to permit the community spouse to retain all or some of the Medicaid recipient’s income if the community spouse’s income falls below a certain amount.
In 2018, if the community spouse’s income falls below $3,090.00 per month, the community spouse is allowed to keep so much of their spouse’s income to raise the community spouse’s income to that level, which is known as the minimum monthly maintenance needs allowance, or MMMNA. If, for example, the community spouse’s income is $1,000.00, and their spouse’s income is $2,000.00, the community spouse would be permitted to keep all of their spouse’s income. But if the community spouse’s income is $1,000.00, and their spouse’s income is $3,000.00, the community spouse would be permitted to keep $2,090.00 of their spouse’s income. The rest would go toward the spouse’s care in the nursing home.
Co-authored by Joanna C. Feldman
This is a question we’re continually asked, so we’re glad we have another opportunity to clear things up. The main thing to remember is this: IRS rules are different from Medicaid rules.
Under current IRS rules, you may gift up to $15,000.00 to as many people as you’d like in 2018 (increased from $14,000.00 in 2017) without needing to file a gift tax return. This is known as the gift tax exclusion, and you can think of gifts that qualify as being excluded from needing to be reported to the IRS. If your gift to someone (other than your spouse) is over $15,000.00, you must tell the IRS.
The annual gift tax exclusion, however, does not tie into Medicaid. Under rules concerning Medicaid eligibility for nursing home services, any gifts within the preceding five (5) year period (often referred to as the “look back period”) will be evaluated and may result in a penalty period during which Medicaid will not pay. (It is important to note that currently, there is no look back period for community Medicaid when one stays at home.)
Again – and I can’t stress this enough – do not try to reduce your assets for Medicaid eligibility purposes by making gifts that you do not need to report to the IRS. You will need to report them to the government for Medicaid purposes, and they can have a detrimental effect on eligibility.
While an annuity might serve you well from a financial planning perspective, financial planners and clients must be aware of the treatment of annuities for Medicaid purposes. For Medicaid eligibility purposes, the cash value of an annuity is considered an available resource. This means that an annuity is treated like cash and if you need to apply for Medicaid, something needs to be done with the annuity, such as transferring the annuity to a spouse or in other cases surrendering the annuity. When surrendering or transferring an annuity, there could be penalties imposed by the insurance company, or worse, recognition of ordinary income for tax purposes. What is important to note here is that an annuity is an available asset for Medicaid eligibility purposes.
Fortunately, if you meet with an elder law attorney well in advance of requiring care, there are planning techniques that can preserve the value of an annuity and avoid grief for everyone. You can create the very popular Medicaid Trust that I have written about many times over. In addition to transferring other assets to the trust such as your home, you can also transfer annuities to the trust. The trust provides that you will receive the income from the trust, thus, if the annuity is annuitized (turned into an income stream), the payments can come out of the trust to you. There are no tax consequences to transferring an annuity to a Medicaid Trust. Financial planners should review their portfolios to identify their clients having annuities and educate them about this planning technique.