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Asset protection tools: private annuities and promissory notes

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Est5-16-12Until recently, if you entered a long-term care facility and wanted to apply for MassHealth, you would have to purchase a commercially offered annuity in order to qualify for Masshealth sooner than if you expended all of your own funds first.

Of course, if you are single, the annuity would have to be based on specific charts and tables issued by the social security administration and approved by MassHealth, and the income from the annuity would also have to be spent on your long-term care. The Commonwealth would also have to be the named beneficiary on the annuity in order to reimburse the state upon your demise, up to value of services provided by MA. 

If you are married, then your at home spouse (community spouse) would be able to receive income from the annuity and not have to utilize those funds for your care in an institution. 

As the commercial annuity may not pay a rate of return that was commensurate with what you want to receive, and due to the fact that it may not have been obtainable in a relatively short period of time, it is no longer as attractive as used to be. Many insurance companies no longer write short-term annuities that comply with the regulations of the Medicaid authorities, and it is increasingly difficult to find highly rated companies that sell these qualifying annuities.

 In the past, a private annuity was available for you to transfer assets to your children, who would then sign an agreement promising to pay the annuity amount to you for whatever period of years was appropriate in your particular case. The Medicaid authorities have basically shut down the opportunity to use private annuities, as they claim that the funds held by children may not be protected from lawsuits, divorces, etc., and therefore, the annuity was not as “commercially sound” as an annuity sold by a licensed insurance company. 

However, a recent case has changed the landscape of annuities, and now private annuities may be utilized for long-term care planning. If your children are not as responsible and trustworthy as you desire, then a private annuity may be re-insured by a commercially acceptable annuity company, which would guarantee that the funds will be available regardless of whether your children pay the premiums. 

Similarly, a promissory note, which is basically an obligation to pay money back, is in the same category. In this situation, you would loan money to your children, who would pay it back to you, thus converting a countable asset, which otherwise would have been spent on long-term care, to a stream of income that is paid monthly. This lower amount that is paid allows you to qualify for benefits sooner, but in the event of your death, then the balance of the funds will have to be paid back to the state up to the amount that the state paid for your care.

In this situation, it is also a viable option to obtain a commercially sold annuity, which basically covers the promissory note, so in the event that your children do not or cannot pay you back due to financial or personal issues, then the insurance company will make the payments. 

In both examples above, you will qualify for Medicaid sooner rather than later and still has some funds available for your personal needs. The private annuity and promissory note are now potentially protected techniques that can allow a Medicaid applicant to attempt to preserve some assets and allow Medicaid benefits to kick in sooner. 

Naturally, they are exceptions under the law, and these asset protection techniques must be properly established you will not be approved for Medicaid eligibility.

 

Hyman G. Darling, Esq.

Photo credit: Microsoft   

 


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