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Divorce and Medicaid – Part 3

In last week’s second part of my post, I laid out some basic strategies for couples who, while still legally married and living together, view themselves as separated or divorced.  Unfortunately in the eyes of Medicaid you aren’t divorced unless you’ve got the Judgment of Divorce to prove it.

When I tell a healthy “community spouse” that his/her assets are countable for Medicaid purposes I hear the disappointment and sometimes the anger, however, in many cases this doesn’t necessarily mean a bad outcome.  That’s because of the way the asset and income rules work for a married couples.  There often are opportunities to protect what the community spouse considers to be his or her assets alone and sometimes we can protect much more than that.

Last week I pointed out that paying off a home mortgage or buying a new home will protect the assets.  I recognize, however, that selling and then buying a new home is not practical and may be overwhelming to an already stressed community spouse.  

A Medicaid compliant annuity is another option.  As I stated last week the community spouse’s income is not counted for purposes of eligibility.  This gives us an opportunity to convert assets to income.  As I have written about in previous blog posts, a Medicaid annuity is a noncancellable, nonassignable actuarial sound annuity.  By taking countable assets and using them to purchase the annuity in the name of the community spouse, assets are converted to income for the non Medicaid spouse.  If the assets used to purchase the annuity are in stock, bonds or other investments they will need to be sold first to generate the cash needed.

So what about  if the assets are held in retirement accounts such as a 401k or an IRA?  There certainly will be tax implications there since these are tax deferred accounts.  There are, however, options there as well.  If the retirement account is held by the community spouse then the annuity purchased can retain its tax deferred status – at least until the annuity payments are made to the spouse – stretching out the tax hit over the life of the annuity, which can be several years or more.

If the retirement account is held by the Medicaid spouse, then the entire account will need to be emptied and transferred to the healthy spouse before the annuity can be purchased.  This will cause a huge tax bill in one year, however, it is still better than the alternative, which is to continue to spend down the account until either the ill spouse dies or the account balance reaches zero.

What remains clear, however, is that an unhappy couple who never divorced still may be able to protect assets provided they get the right advice and assistance in navigating the Medicaid process.