More on Medicare, Medicaid and Your Investments


You recently had a column regarding 529s. Does this hold true for people that have tax-deferred annuities when thinking for applying for medicaid?



Dear Doris —

I assume you're referring to the article about requiring someone who is the owner of a 529 college savings account to use that money for their medical expenses before Medicaid pays any benefits.

(To access any past column simply use our new "Search" function: type in "Buckner" and you'll be able to get my columns since April 2001. )

There are a couple of key concepts you should understand about receiving government health benefits. First of all, Medicare refers to the federal health insurance program which covers anyone over age 65. There are no income restrictions on who is eligible.

Medicaid is completely different. It is a health insurance program jointly run by the federal government and each state. About 60% of the funding comes from Washington, with states contributing the rest. The states get to dole out the money provided they follow the general rules passed by Congress.

There is no age requirement for Medicaid. In fact, children are eligible to receive benefits under this program. However, there are income and wealth restrictions.

By design, Medicaid is supposed to kick in only when you have used up almost all of your personal resources to cover your medical care. As long as they meet the federal guidelines, each state gets to establish how "poor" you have to be in order to qualify for Medicaid assistance. And the amounts differ depending upon whether you are single or have a spouse or dependents.

Take the case of an older person looking for financial assistance to cover the cost of a nursing home. According to Armond Budish, a Cleveland attorney who specializes in Medicaid planning, if the individual is married, he and his spouse are allowed to keep (don't ask me where they came up with this number) $89,280 in assets, plus their house and a car. So a couple with $300,000 in bank accounts and investments would have to spend $210,720 of their own money on nursing home costs before Medicaid pays a dime.

While it's better than losing everything, as any retiree can tell you, $89,280 is not a lot of money. This formula often sentences the healthy spouse to spending the rest of her life near the poverty level.

Though there is some variation from state to state, if you're elderly and single the formula is even stingier: you're allowed to keep less than $10,000 in assets. In addition, depending upon the rules where you live, you could be forced to sell the family home and use those proceeds to cover the cost of your care.

According to Budish, you might be able to avoid this if you indicate that you intend to return to your home, i.e that the nursing home stay is just temporary. However, some states will still require you to sell your home after you've spent a certain period of time in a nursing facility because they assume you will never be returning home again.

Though this sounds draconian, in a way it's understandable: Congress doesn't want people who could otherwise cover their own medical expenses to freeload off taxpayers while their kids are rolling in dough freshly gifted by mom or dad. That's not what Medicaid is about.

Medicaid has a three-year "look-back" with regard to assets because the folks who operate this program aren't dummies. They know middle- and upper-income folks might be tempted to give away a lot of their assets to, say, their kids in order to make themselves look "poor" and thus qualify for government assistance.

Here's how the "look-back" works: when you apply for Medicaid you're required to list all of your assets going back through the past three years. If you had a $50,000 certificate of deposit in 1999, they want to know what happened to it. That $126,000 mutual fund balance you had in 2001— where did it go?

If you thought you were going to get these assets off the books by gifting them to your kids or grandkids, you're out of luck. If they were given away within three years prior to applying for Medicaid, they count against you. In other words, even if the money is no longer "yours," you are ineligible to receive any help from Medicaid for a certain period of time.

For instance, say you transferred an $80,000 mutual fund account to your daughter last year and that the average cost of nursing home care in your state is $4,000/month. By dividing $80,000 by $4,000 you come up with 20. That's the number of months you have to wait until Medicaid will pay any benefits.

Assets given away or transferred more than three years before you apply for Medicaid do not count. This sounds harsh until you recall that the "look-back" period used to be two years. It was expanded to three years only because people were getting a little too creative in arranging their finances. If you can afford to pay for your own care, the government reasons that you ought to do so. And, let's be honest, even if Mom conveniently transfers ownership of her bank account to her daughter, in reality the money is still available to cover Mom's health care. It's all in the family, so to speak.

Now that you've got a bit of the background, let's circle back to your question, Doris.

Annuities are a unique investment vehicle. To some extent, how they are treated for Medicaid purposes depends upon the rules in your state. The main issue is whether the contract with the insurance company has been "annuitized" and converted into an income stream. Once you trigger this, you are no longer the owner of the annuity — the insurance company is — so it's no longer your asset.

So let's return to our married couple with $300,000 in assets. According to Budish, instead of using that $210,270 to pay for nursing home expenses, the healthy spouse could invest it in an annuity and then immediately annuitize the contract.

This would give the couple the best of both worlds: their jointly-owned assets would be down to the Medicaid maximum, so the sick spouse could qualify for assistance. At the same time, although she would no longer be able to control the principal in the annuity (remember, it now belongs to the insurance company), it would still be available to generate income for the healthy spouse. And since it is considered her separate asset, she would not be required to use the income to pay for the ill spouse's nursing home care. The length of the annuitization period can be for as long as the surviving spouse lives and/or for a fixed number of years not exceeding her life expectancy.

While a single person could also convert some assets to an annuity, you would not have as much of an advantage because as the beneficiary of the annuity, you would be expected to use the income to offset your nursing home costs.

(For more on this and other Medicaid strategies, try to get your hands on a copy of Budish's book, "Beating the Medicaid Trap", published in 1996. Look for it in public libraries or on

News alert: Attorney Budish warns that the state of Connecticut has applied for a waiver of the three year look-back period and other Medicaid regulations. If this is approved, he says each state would then be free to set its own guidelines. It could, for instance, throw out the rules which allow you to keep a certain amount of assets. Or, a state could extend the look-back period to, say, ten years. He even predicts you'd see mass migrations of senior citizens as they move from states with tight Medicaid policies into those with more liberal rules.

In short, all hell would break loose. As you can imagine, an array of organizations is vowing to fight this. I'll keep you posted.

Take care,



If you have a question for Gail Buckner and the Your $ Matters column, send them to  along with your name and phone number.

The views expressed in this article are those of Ms. Buckner or the individual commentator, and do not necessarily reflect the views of Putnam Investments Inc. or any of its affiliates. You should consult your own financial adviser for advice regarding your particular financial circumstances. This article is for information only and is not an offer of the sale of any mutual fund or other investment.