Most married nursing home residents can obtain MassHealth coverage by using excess assets to purchase a qualifying immediate annuity. Rather, to be totally accurate, it's the spouse of the nursing home resident who must buy the annuity. The reason this works is that while MassHealth imposes limits on the amount of assets the nursing home resident and his spouse may own, there's no limit on the healthy spouse's income. This can be an important device to protect the financial security of spouses of nursing home residents.
Here's how it works:
To become eligible for MassHealth, the nursing home resident is limited to $2,000 and his spouse is limited to $123,600 (in 2020) in countable assets, or about $125,000. (Countable assets do not include the home, personal belongings, or one car.) The nursing home resident must pay his income to the nursing home less a personal needs allowance of $72.80 a month and in some instances a spousal allowance that the healthy spouse may keep. There is no obligation that the healthy spouse pay any of her income for the nursing home spouse's care.
Nursing home residents and their spouses may not give away assets to get down to the eligibility limit. However, they may purchase property of value. (More on this below.)
Finally, while the spouse's assets are limited to $123,600 for the nursing home spouse to become eligible for MassHealth, after eligibility has been granted, MassHealth no longer monitors the healthy spouse's assets. They may then be any amount.
An immediate annuity is a contract with an insurance under which the insurance company agrees to pay out an income stream to the purchaser, or "annuitant," either for a period of time or for the annuitant's life. For instance, an annuitant might pay the insurance company $300,000 in order to receive $5,200 a month for five years. This will total $312,000, just a 4% return over five years, or less than 1% per year. Immediate annuities provide very low investment returns and only make sense because they can save large amounts in nursing home fees.
Use in MassHealth Planning
By purchasing an immediate annuity, a healthy spouse can convert excess assets into an income stream that she can keep. For example, if a couple—Mr. and Mrs. Green—has $425,000 when Mr. Green moves to a nursing home, Mrs. Green can purchase an immediate annuity for $300,000, making Mr. Green eligible for MassHealth coverage from the moment the purchase is complete. If they were paying $12,000 a month for his care, after the purchase, they will only have to pay over Mr. Green's income. If, for instance, that is $2,000 a month, the purchase of the immediate annuity saves them $10,000 a month.
Since there's no limit on Mrs. Green's asset level after Mr. Green has been approved for MassHealth, she can accumulate the annuity payments over five years and end up where she started with $425,000 in countable assets. (Though, to be sure, this is unlikely since she will be losing Mr. Green's income that will be contributed to the nursing home, helping defray MassHealth's costs to some extent.)
The immediate annuity must meet certain requirements in order to satisfy MassHealth, which they call being "actuarially sound." First, the term of the annuity may not be longer than the annuitant's life expectancy. If in the example above, Mrs. Green's life expectancy is only three years and she purchases a five-year annuity, two fifths of the purchase price—$120,000—will be deemed a transfer of assets making Mr. Green ineligible for benefits for a period of time.
In our current low-interest rate environment, it is impossible to purchase an immediate annuity for a term shorter than five years that meets the second test for actuarial soundness. The second rule is that the annuity must pay out during its term at least as much as the purchase price. At the moment, annuities with terms shorter than five years don't return the original investment. If, for instance, Mrs. Green purchased a three-year annuity for $300,000 paying out $8,000 a month, she would get back $288,000 over three years, which MassHealth would treat as a $12,000 gift to the issuing company, making Mr. Green ineligible for benefits for a period of time. (In fact, the period of time would only be a month or two, which might still make this a good plan.)
As with any legal strategy, the purchase of an immediate annuity works better in some situations than others. Here are a few of the potential pitfalls:
- Cost of liquidation. If the excess assets that are used to purchase the annuity constitute a low-basis stock portfolio, its sale could result in significant taxes on capital gains. If the excess asset is a vacation house, the family may not want to lose it. And, as often happens, the nursing home spouse could have a sizable retirement plan. It's liquidation could result in significant income taxes. (The healthy spouse can annuitize within a retirement plan, reducing the tax cost of her IRAs, but a nursing home spouse can't do the same because the annuity would then have to be paid to him with the payments going to the nursing home.)
- Loss of income. As is mentioned above, the healthy spouse may be entitled to some or all of the nursing home spouse's income under spousal impoverishment rules if her own income is low. If, in the example of the Greens, Mrs. Green were entitled to all of Mr. Green's income of $2,000 a month, she would have to give it up once she began receiving the annuity income. While this probably would not rule out the use of the annuity strategy in this example, it would reduce the benefit by $2,000 a month or $120,000 over five years.
- Both spouses ill. If Mrs. Green has to go to a nursing home, her annuity payments will have to be paid to the facility, reducing or eliminating the benefit of this strategy.
- Premature death. If Mrs. Green dies during the five years of the annuity and Mr. Green survives her, the balance of the annuity payments will have to go to him, and ultimately the nursing home, again reducing the utility of this approach.
- Other options. Everyone's situation is different and depending on the couple's circumstances, other MassHealth planning strategies may offer better results.
Just Scratching the Surface
If you would like more information on this topic, read our legal guide, which you can download here, or view our webinar, Using Annuities is MassHealth Planning for Nursing Home Residents. Also, never embark on this tactic without first consulting with an elder law attorney so that you can understand all of the benefits and costs, the potential alternatives, and any changes in MassHealth policy.