The Deficit Reduction Act compliant spousal annuity is a useful tool to protect assets for those with a spouse in a nursing home. With this planning technique, a special type of annuity is purchased with the couple’s resources that otherwise cause ineligibility for Medical Assistance (Medicaid) long-term care benefits.

Buying the DRA-compliant annuity converts the otherwise excess countable assets into a non-countable and protected income stream for the benefit of the spouse at home. This strategy can significantly accelerate eligibility for Medical Assistance long-term care benefits and help the community spouse make ends meet and avoid impoverishment.

In order to be DRA-compliant, federal laws require that the annuity 1) must be irrevocable and non-assignable, 2) must be actuarially sound, meaning it must pay out within the actuarially determined life expectancy of the community spouse, 3) must provide for equal payments over the term of the annuity, and 4) must name the Pennsylvania Department of Human Services as the first beneficiary to the extent of the Medical Assistance benefits paid on behalf the spouse in the nursing home. If there is a minor or disabled child then the Department can be named as a secondary beneficiary.

The Pennsylvania Department of Human Services has a written policy that purports to limit the use of these annuities. Stated DHS policy is that if the DRA-compliant annuity provides the community spouse with income over certain spousal impoverishment guidelines, then the County Assistance Office can treat the annuity as a countable resource and deny Medicaid long-term care benefits.

A similar policy of another state was brought to federal court, and in a decision that cited Pennsylvania laws, the federal court held that the state’s limit on spousal annuities impermissibly conflicted with federal law. Federal law permits the use of DRA-compliant spousal annuities, and states cannot be more restrictive than federal law on this matter. As a result, we do not see the Pennsylvania of Human Services challenging sensible DRA-compliant spousal annuities, even if they exceed the stated policy.

These annuities are useful in the right circumstances, but they are not the first tool in the elder law attorney’s toolbox. At Gerhard & Gerhard, P.C., we do not sell annuities or receive referral fees from the sale of annuities, so you can be assured that you will receive honest, unbiased advice.

Call our office and together we can develop a sensible, conservative plan to protect assets from long-term care costs.

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