A private annuity, in simple terms, is a contract between two parties who could, for example, be individuals, business entities or trusts.  One party (called “A”) transfers or sells to another party (called “B”) assets having a certain value.  In consideration therefore, B agrees to make payments (annually, monthly or quarterly) to A for a term of years or for A’s lifetime.  The payments, if they are to pass muster with the Internal Revenue Service, must take into consideration the life expectancy of A if the period of payments is related to A’s lifetime (for which there are published tables) and the interest rate in the market at the time of the transaction (120% of the federal midterm rate for the applicable month or the average of the two previous months).

For Medicaid purposes, we want to make sure that the value that B agrees to pay to A is equal to the value of the property sold to B by A.  It is by assuring ourselves that the two values are equal (which can generally be accomplished by employing commercial software to make the calculations) that we will know that no gift from A to B has occurred.  If a gift has occurred, a  Medicaid ineligibility period must be calculated if A or A’s spouse needs or desires institutional care.

Why is the Private Annuity Beneficial in the Marital Context?

The effect of using a private annuity is to turn what may be described as “excess resources” by the folks who runs the Medicaid program into a stream of income.  Thus in the situation of the community spouse (a spouse who does not reside in an institution) who has nonexempt assets in excess of the CSRA (Community Spouse Resource Allowance), we can avoid having the community spouse own those excess resources by using the excess resources to purchase a private annuity from a family member.  We will have converted excess resources into an additional stream of income.  Since the community spouse is obliged to employ only 25% of income above the protected monthly income ($2,319 a month in 2004), 75% of the monthly income in excess of $2,319 can be kept and used for the living needs of the community spouse or saved.  Contributing 25% of the income generated by the increased monthly income flow may be a far better choice than exposing the community spouse to a lawsuit which seeks to recover Medicaid benefits incurred for the spouse in the nursing home from all resources in excess of the CSRA.  The CSRA is a varying amount but clients should note that once resources exceed $75,000 its time to at least review your situation.  Furthermore, for many clients the thought of going through a court proceeding where the community spouse is being sued is akin to having root canal.  That being said, the private annuity has the added advantage of serving as a very useful psychological elixir.