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Picture this: Your spouse has made a permanent move to a nursing home. You don’t have long-term care insurance, Medicare won’t cover the cost, and you have too much money to qualify for Medicaid — but not nearly enough to afford the nursing-home bills. The monthly tab — easily $8,000 or more for a semi-private room — is rapidly depleting your nest egg. Now what?

This is where a Medicaid-compliant annuity might rescue your retirement. You buy an immediate annuity — owned by and payable to you — that meets a number of special requirements, transforming cash that would otherwise prevent your ill spouse from qualifying for Medicaid into an income stream that helps you preserve your quality of life. Medicaid starts covering the nursing-home stay, and your monthly bills become manageable.

For an average family, “it takes 50 years to save a couple hundred thousand dollars,” said Dale Krause, president and chief executive officer of Krause Financial Services, in De Pere, Wis. When nursing-home bills start eating into that nest egg, “they all do the math and say, ‘we’re going to be broke.’”

For those who have the luxury of time, there are better ways to plan for long-term care costs. If you’re relatively young and healthy, you may be able to get long-term care insurance — or simply turbocharge your savings with the aim of self-insuring any long-term care costs.

But for couples in a crisis situation, who are watching their life savings evaporate as they pay nursing-home bills, a Medicaid-compliant annuity may be the only way to preserve a livable income for the spouse who remains at home.

Medicaid-compliant annuities

Medicaid recipients generally cannot retain more than $2,000 in cash. But when one spouse enters a nursing home and the other remains in the larger community, a number of special rules apply.

The healthy spouse can keep a certain amount of assets, which varies by state. (In Maryland, the amount is $123,600 in 2018). Note: Bank accounts and investments — including IRAs, in most states — count toward that threshold. Your primary residence, household items, personal effects, car, a limited amount of life insurance and a prepaid burial plan typically don’t count, though the uncounted amount of your home equity may be limited.)

The healthy spouse’s income isn’t counted when determining Medicaid eligibility. And while the Medicaid recipient generally must use his available income to pay for his care costs, the healthy spouse can keep some or all of that income — as much as $3,090 a month in 2018 — if she otherwise would not have enough to live on.

Couples trying to squeeze under Medicaid’s asset limits are confronted with difficult choices: They can spend down their life savings, leaving little for the healthy spouse to live on, or the couple can give away money, which will trigger a period of Medicaid ineligibility if the gift is made less than five years before applying for Medicaid.

A properly structured Medicaid-compliant annuity can reduce the need for such drastic measures.

These annuities aren’t without controversy. Some states in recent years have sought to limit their use — backing down only after losing a series of lawsuits brought by annuity purchasers who were improperly denied Medicaid benefits.

And a bill introduced in Congress early last year would count half the income from a healthy spouse’s annuity when determining the Medicaid eligibility of the institutionalized spouse — but that measure has gained little momentum.

Many rules to follow

Medicaid-compliant annuities must be single-premium immediate annuities and irrevocable — meaning the payment amount, duration of payments, and parties to the contract can’t be changed.

Payments must be made in equal amounts, and are typically guaranteed for a certain number of years, rather than for the rest of the annuitant’s life.

Generally, the state must be named as a beneficiary. So if you die before collecting all the guaranteed payments, the state can recover from the remaining payments some or all of the value of the Medicaid assistance provided.

Who should consider a Medicaid-compliant annuity? People with moderate savings — perhaps $500,000 or less — who find themselves paying nursing home bills out of pocket. Jake Lowrey, president of Lowrey Financial Group, in Beverly, Mass., said most of his clients purchasing Medicaid annuities have $200,000 to $300,000 in savings.

For people who are not in a crisis situation, these aren’t good investments. Because they’re designed for people in desperate straits, they generally offer minimal returns — perhaps 1 percent or so.

People with millions of dollars are much better off earning a market rate of return on their money and paying the nursing-home bills themselves, according to William Browning, an elder-law attorney at Browning & Meyer, in Worthington, Ohio.

Medicaid annuities don’t allow for much advance planning. Because you don’t want to tie up money that could be needed for other expenses, you should only buy a Medicaid-compliant annuity when you know your spouse has moved to a facility permanently, Krause said.

And the amount that you should invest in the annuity will be determined in part by how your finances look on the “snapshot date” — the date your spouse has spent 30 consecutive days in the facility.

An example of the savings

Krause Financial offers this example of how a Medicaid annuity might help a couple burdened with unmanageable nursing-home bills: George, who suffers from Parkinson’s disease, enters a nursing home where the monthly bill is $7,250. He and his wife, Betty, have $200,000 in bank accounts and other countable assets.

If they pay the nursing home bills out of pocket, they’ll have spent down enough for George to qualify for Medicaid within 16 months. Most of their nest egg will be gone, and Betty will be left with her $1,000 monthly Social Security check.

If instead Betty invests $103,000 in a Medicaid-compliant annuity with a term of 83 months — her remaining life expectancy — she gets an additional $1,267 of guaranteed monthly income. And George immediately qualifies for Medicaid.

He has monthly Social Security and pension income of $1,500, and $823 of that is shifted to Betty to bring her up to the Medicaid spouse’s $3,090 monthly income allowance. George can also keep $45 of his monthly income for personal needs, so his Medicaid co-pay is just $632 — saving the couple $6,618 a month.

These annuities are sold by insurers such as Nationwide and ELCO Mutual Life & Annuity. But your first stop if you’re considering a Medicaid annuity should be an elder-law attorney. (Find one at naela.org.)

“When you put your spouse in a facility, there’s a whole gamut of legal issues you have to get through,” Browning said. A good elder-law attorney will update your estate plan and powers of attorney — then help you determine whether a Medicaid annuity might be right for you.

© 2017, Kiplinger, All rights reserved. Distributed by Tribune Content Agency, LLC.