Can a Tax-Deferred Annuity be Converted into a Medicaid-Compliant Annuity?

Yes, a tax-deferred annuity can easily be converted into a Medicaid Compliant Annuity.

If the current carrier does not provide a Medicaid Compliant Annuity, the tax-deferred annuity can be "transferred" to the desired carrier by way of a 1035 exchange.

A 1035 exchange refers to the section of the tax code that allows investors the flexibility to exchange one annuity for another without incurring any immediate tax liabilities. Generally, the surrender of an existing insurance contract is a taxable event since the contract owner must recognize any gain on the old contract as current income. However, under IRC § 1035, when one life insurance, endowment, or annuity contract is exchanged for another, the transfer will be nontaxable, provided certain requirements are met.

Requirement One: Ownership
The owner and insured, or annuitant, on the new contract must be the same as under the old contract. However, changes in ownership may occur before the change is completed.

Requirement Two: Like for Like
Any type of contract cannot be exchanged for any other type of contract. The following rules must be followed in order to avoid tax consequences:

  • Old Life Contract » New Life Contract
  • Old Life Contract » New Annuity Contract
  • Old Endowment Contract » New Annuity Contract
  • Old Annuity Contract » New Annuity Contract

The exchange process can be initiated by simply completing a transfer form with the new Medicaid Compliant Annuity application.

These are highly specialized financial products and only a select few firms in the industry have expertise in this area. Because qualification (or potential ineligibilty) for Medicaid benefits and, possibly, one's life savings are at stake, you should only consult with a qualified professional advisor. The Wall Law Group welcomes your inquiries in this regard.

Medicaid Estate Recovery--A Medicaid Death Tax

While Washington and the Media debate what to do about the Federal Estate Tax, another even more pernicious death tax goes unnoticed by lawmakers. Medicaid Estate Recovery is a federal mandate that requires States to recoup the costs of long term care paid by Medicaid.

Medicaid, not Medicare, is the biggest government source of payment for long term care. Most people who reside in nursing homes have part of the cost of their care paid by Medicaid. And many frail seniors who reside at home with help from their family also get some assistance from Medicaid.

If you are elderly and need financial help to meet your care needs, the Government wants your home or farm when you die.

Essentially, estate recovery turns government financial help to frail seniors of modest means into a loan program with collection taking place at death. If Medicaid helped pay for any of your care, your estate may be forced to repay the government after you die.

Estate recovery is a Medicaid “death tax” imposed only on the elderly. Because most assets must be spent before a senior becomes eligible for Medicaid, recovery efforts focus on real estate – mainly the home or family farm. Although States bear the costs and burdens of collection, most of the money collected goes to the federal government.

Estate recovery was first mandated by the federal government in 1993. States are given some discretion over the scope of the assets that will be subject to recovery, although, at a minimum, recovery must include collection from the probate estate of the recipient of Medicaid. Most states have expanded recovery beyond the minimum requirements. Michigan enacted its estate recovery legislation in October, 2007. 

Here is an example of how estate recovery works:

When John came back from Korea he took over working the family farm. Eventually, John and his wife Mary inherited the farm from John’s parents. John and Mary were always poor, but they worked hard their whole lives and raised two fine sons. They were proud when both of the boys received degrees in Agriculture from Michigan State University. They were even more proud when both of the boys came home to help their father work the farm.

In 2000 Mary’s health began to decline due to Parkinson’s disease and dementia. Everyone in the family pitched in to care for Mary and keep her home. In 2003, after 3 years of struggle, the family needed some outside help. They applied for home care that was paid for in part by Medicaid. This extra help, combined with the ongoing care by John and the boys and their wives, allowed Mary to stay at home for another full year.

In 2006 John died of a heart attack. Without John's support in caring for Mary, the family was no longer able to care for Mary at home. She moved to a local nursing facility. The family didn't have the cash to fully afford the nearly $8,000 a month cost and Medicaid benefits were needed.

Mary died in January 2009. She was 84. Three weeks later her sons received a letter in the mail from the Government. The letter said Michigan was owed $171,386 for the Medicaid that was provided for Mary’s care, both at home and in the nursing facility. The boys are going to have to find some way to pay off this state lien. But they don't have this kind of money. Most likely, the farm will have to be sold.

In some cases, the fear of losing their home or farm to estate recovery deters seniors from getting the care they may desperately need. Failing to provide needed care puts both the senior and caregiver at risk and is likely to ultimately increase the cost of care.

Because Michigan's estate recovery program is still in its infancy and coordiation between the State and Federal departments is pending, the particulars as to exactly how Michigan will implement and enforce estate recovery remains uncertain. These are tough times for all of us, including the State government. But helping people get the care they need at the end of their lives should not give the government the right to take our property. Much more than money is at stake in the battle over estate recovery. Thousands of families are struggling, often magnificently, to do the right thing for their loved ones. We need to support our families and caregivers, not take their property. 

Note: Proper credit for the above article should be given to Jeffrey A. Marshall, CELA of Marshall, Parker & Associates, LLC located in Williamsport, Wilkes-Barre, Scranton, Jersey Shore, Pennsylvania.  Attorney Marshall publishes a very informative blog located at: