Using Annuities in Medicaid Planning: A Complex but Powerful Strategy

6 days ago

3 min read

When planning for long-term care, one of the biggest challenges families face is how to legally protect assets while still qualifying for Medicaid. One lesser-known but highly strategic tool is the use of annuities—a financial product that, when used properly, can convert countable resources into non-countable income.

But beware: the rules are complex, vary by state, and are constantly evolving. Here’s what you need to know—especially if you're planning in Texas.

Understanding the Basics: What are Annuities in Medicaid Planning?

In simple terms, an annuity in Medicaid Planning is a contract that turns a lump sum of money into a stream of income. You might already be more familiar with annuities than you think—pensions are actually a type of annuity.

Key Medicaid Distinction:

Resources (like a savings account or IRA) count against you when applying for Medicaid.
Income, on the other hand, may be allowed up to a limit—and under certain conditions, income can be shifted to a spouse.

So, if you can take a countable asset and turn it into income, especially for a spouse, you can potentially qualify for Medicaid faster and preserve more money.

Important Law Change: The Deficit Reduction Act of 2005

In 2005, the federal government changed the rules surrounding annuities in Medicaid Planning through the Deficit Reduction Act (DRA). Since then, states—including Texas—have adopted stricter criteria for how annuities are treated for Medicaid purposes.

Post-DRA Rules in Summary:

The state (e.g., Texas) must be the remainder beneficiary of the annuity after the Medicaid recipient dies—meaning the state can recover funds.
The annuity must be irrevocable and non-assignable.
The annuity must provide equal payments with no balloon payouts.
The annuity must be actuarially sound (based on the life expectancy of the person buying it).

These rules are in place to prevent people from hiding money in annuities simply to qualify for benefits.

3 Types of Annuities to Understand

1. Employer-Related Annuities (Pensions)

These are straightforward:

If Mom or Dad receives a pension, Medicaid considers it income, not a countable asset.
It is not a disqualifying resource.
This is important when discussing Qualified Domestic Relations Orders (QDROs), which we’ve talked about in other strategies to shift income between spouses.

2. IRA or 401(k) Rollovers into Annuities (Texas-Specific Strategy)

Here’s where it gets more complex—and powerful.

In Texas (as of today):

You can roll over funds from an IRA or 401(k) into an annuity.
As long as the annuity does not pay out income immediately, and Texas is named as the remainder beneficiary, it won’t count as a resource.
It also won’t count as income—because no income is being paid out yet.

⚠️ This is an extremely narrow and temporary window of opportunity. The rules could change at any time, and when they do, this type of deferred annuity may no longer be protected.

If the rules do change:

The annuity must start paying income to be excluded as a resource.
That income will be counted as part of the applicant’s income for Medicaid eligibility.
The income can be directed to a community spouse, which may still offer planning opportunities.

3. Non-Retirement Cash Put Into Annuities

If you’re working with non-IRA cash—such as savings or investments—you can still use annuities to convert these resources into income. However:

Texas must be named as the primary remainder beneficiary.
You must follow the strict post-DRA annuity rules mentioned above.
This strategy requires precise planning and documentation, and isn’t for everyone.

In some cases, it may not be worth it if your main goal is leaving an inheritance, as Texas could claim the balance upon death.

Final Thoughts: Talk to an Elder Law Attorney First

This strategy is not do-it-yourself territory. Between changing rules, federal guidelines, and Texas-specific exceptions, annuities can either be your best tool or a costly mistake in Medicaid planning.

At Willingham Law Firm, P.C., we walk our clients through every option and help determine whether an annuity is a good fit for: