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Paying for Long Term Care:
The Gift & Annuity Strategy

Marks Elder Law Michael H. Marks, Esq.

Michael H. Marks

Linda Law Carroll


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This strategy is generally relevant for single, unmarried persons seeking Medicaid nursing care benefits only. Please refer to the separate text titled “Medicaid – Basic Rules: Single Person” for the applicable basic Medicaid rules.”

If you want Medicaid benefits to pay for nursing home care or home nursing but have too much money to qualify, the “Gift and Annuity Strategy" can help you to protect some of your assets and become eligible for Medicaid sooner.

In brief: you can typically protect about one half of your assets but still be eligible to get Medicaid for nursing care by making a gift then using a Medicaid-qualified immediate annuity before applying to Medicaid. Otherwise, Medicaid rules would require you to spend down all of almost all of your own money before Medicaid would start to pay anything for you.

A Medicaid-qualified immediate annuity works by converting part of your assets into income that you can use to pay for your cost of care until you become Medicaid eligible. This strategy is often particularly helpful for a single, unmarried person, because other techniques are available for married spouses.

Steps to Implement the Gift and Annuity Strategy

  1. Make a Gift of a Portion of your Assets

    First, you make a gift to your child or other trusted person of a portion of your financial assets – typically a little more than half of your excess “available resources” under basic Medicaid rules. We know that making this gift will cause a period of ineligibility when you apply for Medicaid immediately thereafter.

  2. Purchase an Immediate Annuity then that Converts Remaining Assets into Income

    Second, using almost all of your remaining financial resources, you buy a Medicaid- qualified immediate annuity, to convert those assets remaining on deposit into a temporary monthly income stream for yourself.

    An “immediate annuity” is one that immediately begins to pay a series of monthly income payments for a period of time, rather than maintaining a certain value on deposit. A “Medicaid qualified” annuity is one that has equal payments with no balloon payment at the end, and is irrevocable and non-assignable, and is for a term or duration shorter than the statistical life expectancy of the annuitant (the person upon whose life the annuity is based).

  3. The third step is to apply for Medicaid.

Impact: the Period of Ineligibility is Accelerated

If you make a gift or transfer away assets within five years prior to applying for Medicaid – the so-called “five year look back period” - you suffer a period of ineligibility (a “penalty period”) which delays the beginning of Medicaid benefits. The period of ineligibility arising from the gift corresponds to how much longer you could have paid for your own care if you hadn’t given the gift -- determined by dividing the amount transferred by what Medicaid determines to be the average private pay cost of a nursing home. (Please see Illustration for an example of this calculation).

The Gift & Annuity Strategy shortens this penalty period and simultaneously protects a portion of your assets. During the penalty period you use your temporarily increased income from the short term annuity (your “excess resources”) plus your ordinary ongoing income to pay for almost all of your nursing home bills. (By the way, it’s also important to make sure that your total income does not exceed your base cost of care, to be otherwise Medicaid eligible.)

When the penalty period is over you are now Medicaid eligible. Medicaid will then begin to pay for your nursing care costs. Simultaneously, the short term annuity that you used to pay almost all of your costs of care during those months ends, and your income returns to its normal, lower level.

When they review the application, the Medicaid authorities will determine that the penalty period began to run when you applied for Medicaid and ended when you exhausted your excess available resources (the annuity). Medicaid will pay for your nursing home care after that.

Strategy Implications

  • As noted above, this strategy only works after you have become “Nursing Facility Clinically Eligible,” and need nursing level care. It is not an effective strategy before that time.
  • Using this strategy you can only protect a part of your assets – but without this strategy you may need to spend almost everything you have before Medicaid will start to pay for you.
  • One disadvantage is that this strategy can sometimes require liquidating some assets to purchase the new annuity. Cashing in certain kinds of assets such as an IRA or other qualified retirement plan can result in realizing taxable income. (However for a nursing home patient, extremely high medical expenses can provide some tax deduction to offset the additional taxable income.)
  • Most important, this strategy requires having a trustworthy custodian, someone who will securely safeguard these funds for you and for your benefit if needed later on.

How it Works, by the Numbers – An Illustration

For example, suppose that you are in a nursing home that costs $9,000 per month. You have a fixed income of $2,500 per month so you’re short by $6,500 every month. You have $105,000 in the bank. You can get Medicaid and still be allowed to keep $8,000 in cash, and also put $8,000 into a prepaid, Irrevocable Funeral Account. That $16,000 is considered exempt, protected, non-countable resources under Medicaid rules. Now your remaining excess available resources amount to $89,000. ($105,000 minus $8,000 minus $8,000).

At $6,500 per month, you will use up your bank assets in 14 months!, Instead you can:

  1. Give a gift of about $45,000 to your son or daughter to hold reliably for you.
  2. Use the rest of your available cash, $44,000, to buy an Medicaid Qualified Immediate Annuity that will pay you an income of about $6,285 starting the next month and every month for the next seven months.
  3. Apply for Medicaid. The penalty period of ineligibility begins to run right away for seven months.
  4. Your income for the next seven months will be $8,785 ($2,500 plus $6,285) – almost enough to pay your nursing home bill of $9,000 each month. Your son or daughter will make up the shortfall from the amount that you gifted to them.
  5. At the end of seven months, the penalty period of ineligibility is over and Medicaid will begin to pay for you. The annuity payments are over and your income drops down to its ordinary level of $2,500 a month.
  6. Your son or daughter ends up safely holding about $43,500 for you (plus your $8,000 exempt cash and the $8,000 prepaid funeral).

Or, if you start with $200,000 in the bank and make a gift of $110,000, your child ends up shielding about $106,000 for you that would otherwise have been spent.


Assets: $105,000

Funeral Policy: $8,000

Medicaid Eligible Cash: $8,000

Income: $2,500/mo.

Cost of Care: $9,000/mo.

Scenario #1:
No “Gift & Annuity” - Use Your Assets to Pay for Nursing Home Care

Assets Used per Month: $6,500/mo.
($9,000 - $2,500 = $6,500)

Assets Will Last: 14 Months
$89,000/$6,500=13.7 months)

Scenario #1 Result:

Cash: $8,000

Funeral Policy $8,000

Total Assets: $16,000

Medicaid Now Pays for Your Care after 14 Months

Scenario #2:
Purchase Immediate Annuity and Gift Assets to Children

Gift to Children: $43,000

Purchase Annuity: $45,000

(Generates $6,285/mo. For 7/mo.)

Period of Ineligibility: 7 months

Scenario #2 Result:

Children-Held Assets: $43,000

Cash: $8,000

Funeral Policy $8,000

Total Assets: $59,000

Medicaid Now Pays for Your Care After 7 months


You can use the Gift and Annuity strategy, after you have become Nursing Facility Clinically Eligible, to protect part of your remaining excess available resources under Medicaid rules, and become eligible for Medicaid much sooner, while someone else holds the protected, gifted assets safely for you.

Call today to meet with an elder law attorney in Pittsburgh, with offices in Monroeville. Contact Marks Elder Law today to start the planning process.

We will gladly review your planning for long term care to ensure it is up-to-date.