Annuities are common estate planning tools, but they are also often used in Medicaid planning to turn an applicant’s assets into income. The applicant purchases the annuity for a specified term and designates a beneficiary to receive the balance of payments should the policyholder die before the end of the term. For Medicaid purposes, this does not constitute a transfer of assets for less than fair market value as long as the specified term does not exceed the policyholder’s life expectancy.

However, the Health Care Financing Administration recently ruled that a state has the option to recover Medicaid expenditures from the surviving beneficiary of a deceased Medicaid patient’s annuity. Though federal Medicaid statutes require states to recover Medicaid expenses from the estates of Medicaid recipients, not all states have implemented estate recovery policies. And even those states that have implemented estate recovery policies will not be able to recover against the beneficiary of a Medicaid recipient’s annuity unless the state has expanded the definition of "estate" to include certain non-probate assets.

Also, Medicaid recovery against annuities cannot begin until the calendar quarter 90 days after an amendment is made to HCFA’s State Medicaid Manual permitting such recovery. Each state’s own Medicaid plan must also be amended to include annuities in its definition of "estate."