The state regulations on treatment of annuities are found in Section 8.110.55 & 8.110.56, Volume 8 of the Colorado Department of Health Care Policy and Financing Medicaid Staff Manual, 10 C.C.R. 2505-10. In that section, an annuity is now defined as:
“. . . a contract between and individual and a commercial company, in which the individual invests funds and in return is guaranteed fixed substantially equal installments for life or a specified number of years.”
Under Colorado Medicaid regulations, once an annuity has been annuitized and the annuitant is receiving regular distributions, the annuity is no longer considered an available resource for purposes of determining Medicaid eligibility. Instead, the monthly distributions are considered income to the annuitant in the month received.
Treatment of Annuities Purchased on or after February 8, 2006
Purchasing an annuity which will make monthly payments to the Medicaid recipient will not result in a transfer penalty, regardless of the size of the annuity payment, so long as the annuity meets the following criteria:
The annuity must have been purchased from a life insurance company or other commercial company that sells annuities as part of its normal course of business;
The annuity must be annuitized to the Medicaid recipient;
The annuity must be “actuarially sound,” meaning it must be designed to pay out completely during the Medicaid recipient’s remaining life expectancy (as determined by the appropriate life expectancy table — male or female — contained in the regulations);
The annuity must make substantially equal payments over the entire period of the annuity; and
The annuity must name the state as death beneficiary, at least up the amount of Medicaid benefits paid to the annuitant. The state must be named as first death beneficiary unless the recipient has a spouse or a minor or disabled child, in which case that spouse or child may be named as first death beneficiary, with the state as second beneficiary if the spouse or child disposes of his or her remainder interest without fair consideration.
At first glance, it would seem futile to purchase such an annuity since virtually all of the annuity payments after the Medicaid recipient enters the nursing home (or begins receiving long- term care services at home) will be used to pay for long-term care expenses; however, such an annuity could be a very effective planning tool whenever the Medicaid recipient makes gifts on or after February 8, 2006 to qualify for Medicaid.
For example, the annuity would be purchased with all of the Medicaid-recipient’s excess resources remaining after completion of the recipient’s “spend down” and other gifts (i.e., after the hold-back amount traditionally used in a pre-DRA “half-a-loaf” gifting plan) and would be structured to pay out for a term not to exceed the penalty period from the transfers, or 60 months, whichever is shorter. Further, the monthly payments from the annuity would be designed to pay for the recipient’s monthly long term care expenses in excess of the recipient’s other income during the penalty period or look-back period. The annuity should not be annuitized until the recipient enters the nursing home or begins receiving long term care services at home.
Once annuitized, the annuity would no longer be countable as a resource and would not, by itself, delay the start of the penalty period once the Medicaid recipient is in a long term care setting and receiving services since the recipient would have no more excess resources and would qualify for Medicaid, but for the transfers. The annuity payments could then provide for the Medicaid recipient’s nursing home or other long term care expenses during the penalty period or look-back period. Once the annuity is exhausted and the penalty period or look-back period has expired, the recipient could begin receiving Medicaid long term care benefits in the nursing home or at home through HCBS.