He Moved $1 Million Into an Annuity Before Applying for Medicaid. One Mistake Could Delay Coverage and Leave Him Paying Nursing Home Bills

Imagine a 78-year-old widower facing the possibility of moving into a nursing home. An insurance agent assures him an annuity can protect his savings, so a few months before his family applies for Medicaid, he moves $1 million into one. He believes his money is safe.

Medicaid may see it differently. Under the Deficit Reduction Act of 2005, an annuity that fails certain federal requirements can be treated as an improper asset transfer, much like giving money away before applying for coverage. If the state isn’t properly named as a beneficiary, the full $1 million purchase price can enter the penalty calculation. That could delay Medicaid’s payment for nursing home care while the bills keep coming.

The tax code and Medicaid run on separate rulebooks. An annuity can get favorable tax treatment and still flunk Medicaid’s tests.

How the Deficit Reduction Act Turns a $1 Million Annuity Into a Gift

Medicare and Medicaid cover different kinds of nursing home care, an important distinction. Medicare generally covers short-term skilled nursing care under specific conditions, not ongoing custodial care in a nursing home. In 2026, patients with Original Medicare pay $217 a day for covered skilled nursing facility stays from days 21 through 100. Medicaid, meanwhile, can cover long-term nursing home care for people who meet its financial and medical requirements. That’s the coverage our widower needs, and why the annuity becomes a problem.

The Centers for Medicare and Medicaid Services (CMS) guidance on the 2005 law details the tests. Applicants for Medicaid long-term care must disclose any interest in an annuity. After that, the contract has to clear two hurdles:

• The state as remainder beneficiary. The annuity must name the state as the primary remainder beneficiary, or as the second one after a community spouse or a minor or disabled child, for at least the value of the Medicaid assistance provided. If the state sits in the wrong position, the annuity counts as a transfer.
• The contract’s structure. An annuity bought by or for the applicant also counts as a transfer unless it meets IRS retirement-plan requirements or is irrevocable, non-assignable, actuarially sound and pays equal amounts with no deferral and no balloon payments.

The contract pays out over a period the applicant is expected to live through. Picture a 15-year payout sold to someone with a much shorter life expectancy: that structure works mainly for the heirs, and Medicaid handles it that way.

The retirement-plan exception covers contracts such as an individual retirement annuity. The tax code defines that product partly by one requirement: the contract is not transferable by the owner.

Timing matters too. The look-back goes back 60 months, or five years, before the application. A purchase made a few months before filing lands squarely inside that window.

Say our widower bought a deferred annuity that names his daughter as beneficiary and lets him cash out. The beneficiary designation and delayed payments raise problems under Medicaid’s transfer rules. The cash-out option creates another concern: the state may treat the annuity’s available value as an asset he still owns. Either way, moving the money into the contract hasn’t necessarily protected it.

Spouse Annuities Follow a Different Path

For married couples, the rules offer another possibility. Under Medicaid rules, a community spouse, the husband or wife who remains at home, can be named ahead of the state as an annuity’s remainder beneficiary. Properly structured annuities may also convert countable savings into income for that spouse, helping preserve money for living expenses while the other spouse receives nursing home care. But the arrangement must satisfy the applicable Medicaid requirements.

The federal tests don’t apply the same way in every spouse scenario, and state rules fill in key details. Guidelines and recovery rules vary by state law, so a contract that passes in one state can run into trouble in another. Income rules also matter. In states with income limits for long-term care Medicaid, a large annuity payment to the applicant can complicate eligibility, although some states permit qualified income trusts. Even when someone qualifies, much of their income may have to go toward nursing home costs, leaving Medicaid to cover the remaining eligible expenses.

Seven Contract Details That Decide Whether Medicaid Sees a Gift

A single clause can flip the outcome. Before anyone files, families and their attorneys pull the actual contract and check:

• Owner and annuitant, and whether each one is the applicant or the spouse
• Beneficiary order, with the state in the first slot or the permitted second slot
• Issue date, measured against the look-back window
• Term, compared with the annuitant’s life expectancy
• Surrender or assignment rights, which can make the contract look like an asset Medicaid counts
• Payment schedule, checked for deferral periods or a balloon payment at the end
• Funding source, including whether qualified retirement money such as an IRA paid for the purchase

Run the widower’s paperwork through that list and the problems jump out: deferral, a cash-out right and a daughter where the state should be. Each one is fixable before the money moves and costly after.

An annuity works best as the last step in a Medicaid plan, after the family has reviewed the applicant’s assets, the spouse’s needs and the state’s rules. Sold as the first move, a $1 million contract can cause the very penalty it was supposed to prevent. If structured strategically under the state’s Medicaid rules, an annuity may help solve the asset problem without creating a new eligibility obstacle.

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