631 / What is a Medicaid compliant annuity? How can Medicaid compliant annuities be used in an individual’s planning?

Rather than treating the purchase of the annuity as an impermissible asset transfer effected in order to meet Medicaid’s means-tested eligibility requirements, if the requirements discussed below are satisfied, the federal Deficit Reduction Act (DRA) treats the purchase as a permissible exempt investment, and the annuity payout stream is shielded as the community spouse’s income.

In order to qualify as a Medicaid compliant annuity under the DRA, the terms of the annuity contract must satisfy certain criteria. The income from the annuity contract must be payable to the community spouse, the contract must be irrevocable, and the payment term must be based on the life expectancy of the community spouse.

This is because, in a situation where one spouse requires long-term care and the other remains in the community, the assets of the community spouse are counted—up to a certain level—in determining whether the institutionalized spouse qualifies for Medicaid, but the income of that spouse is not counted.