Q. I have three annuities. If my wife or I need to go into a nursing home, do we need to cash them in to be eligible for a Medi-Cal subsidy?
A. Well, like many things in life, it all depends. If your annuities are held inside an IRA owned by you or your wife, and you are both over age 70 ½ [1] and receiving Minimum Required Distributions under IRS rules, then you won’t need to cash them in. Otherwise, you will need to consider the following:
Deferred Annuities: If the annuity payouts have been deferred (“Deferred Annuities”), then Medi-Cal will count their cash values. The next question is whether their cash values, when combined with your other savings and investments, puts you over the Medi-Cal resource ceilings: $126,420 (married individual); single individual, $2,000 (for 2019). If so, we sometimes refer to this as being “over resourced”. If they do put you over, then you will need to take action. Some possible planning strategies:
(1) Opt to Start Payouts: If you opt to begin receiving “periodic payments of principal and interest”, in equal monthly payments, and provided that the pay-outs are scheduled to fully exhaust each annuity within the actuarial life expectancy of the owner, then their remaining values won’t count as a Medi-Cal resource.
(2) Cash In & Make Exempt Purchases: You might cash in one or all of the annuities, as necessary, and then use those proceeds to make purchases which Medi-Cal considers exempt, such as: home maintenance, home improvements, home mortgage pay-down, purchase of cemetery plots, funeral plans, or household furnishings.
(3) Convert Annuities: Convert the annuities with cash value into income-only immediate annuities without cash value (see below).
(4) Cash In & Gift Away: Cash in the annuities which put you over the resource ceiling and then make what I call “strategic gifts” to your children or other trusted family members, but subject to the following CAUTION: if you choose this gifting option, you are very strongly urged to do so only under the strict guidance of an elder law attorney with experience in these matters. Why? Because gifting in this context is very “tricky” and requires careful compliance with the Medi-Cal rules, which are actually designed to discourage gifting. If you attempt a gifting program on your own, and you do so incorrectly, you may actually end up disqualifying yourselves from a Medi-Cal subsidy.
Immediate Annuities: If your annuities are irrevocable, income-only “immediate annuities” without cash value, and provided that they are designed to pay out to their owner the full value within his/her actuarial life expectancy, then they will not count against the Medi-Cal resource ceilings. However, the income that you thereby receive from them may count toward your monthly “Share of Cost” (co-pay) for nursing care.
On the other hand, if these immediate annuities are not so designed, then the funds used to purchase them may be considered a disqualifying transfer of assets. This is a bit different from being “over-resourced”, but has a similar effect: If so construed, you may be found ineligible for a Medi-Cal subsidy under the transfer penalty rules, and this ineligibility may extend for a lengthy period of time.
To be sure, the whole subject of annuities in the Medi-Cal context is quite tricky. Your best bet is to seek guidance from an experienced elder law attorney before you take any action.
Note #1: Age 70.5 was formerly the maximum age when an IRA owner was required to start taking Minimum Required Distributions (“RMD’s”). However, effective with the SECURE ACT which became effective 01/01/2020 throughout the nation, that maximum age to start draws has been increased to 72. However, as of this writing, the Medi-Cal folks have not changed their rule promulgated back on 10/18/2002, which treats IRA’s of persons aged 70.5 or older, who are drawing out RMD’s, as exempt. See ACWDL 02-51 (10/18/2002) at Q & A # 4. Until that occurs, it is suggested that owners of annuities held inside their IRA’s, and who apply for Medi-Cal and wish their annuities to be treated as “unavailable” and therefore not countable as a resource, begin taking MRD’s when they reach age 70.5.