He Put $1 Million Into an Annuity Before Seeking Medicaid. One Error Could Stall Coverage and Leave Nursing Home Costs Unpaid

A $1 million annuity may look like a sensible way to shield savings before a nursing home move, but Medicaid follows a different set of rules than the tax code, and a few missed contract details can turn a retirement strategy into a costly mistake.

Consider a 78-year-old widower who may need nursing home care. An insurance agent tells him an annuity can safeguard his assets, so months before his family applies for Medicaid, he moves $1 million into one. He assumes the money is protected.

Medicaid may not agree. Under the Deficit Reduction Act of 2005, an annuity that misses certain federal requirements can be treated as an improper transfer, similar to giving money away before asking for benefits. If the state is not properly listed as a beneficiary, the entire $1 million purchase price can be included in the penalty calculation. That could postpone Medicaid coverage for nursing home care while the bills continue to arrive.

The tax code and Medicaid operate under separate standards. An annuity can receive favorable tax treatment and still fail Medicaid’s eligibility tests.

How Federal Law Can Turn a $1 Million Annuity Into a Transfer

Medicare and Medicaid cover different kinds of nursing home care, and that distinction matters. Medicare generally pays for short-term skilled nursing care only under limited conditions, not ongoing custodial care in a nursing home. Patients with Original Medicare pay $217 a day in 2026 for covered skilled nursing facility stays from days 21 through 100. Medicaid, by contrast, can cover long-term nursing home care for people who meet both financial and medical rules. That is the kind of coverage the widower needs, which is why the annuity becomes an issue.

Centers for Medicare and Medicaid Services guidance on the 2005 law lays out the requirements. People applying for long-term care Medicaid must disclose any interest in an annuity. Then the contract has to pass two tests:

• The state as remainder beneficiary. The annuity must name the state as the primary remainder beneficiary, or as the second beneficiary after a community spouse or a minor or disabled child, for at least the value of Medicaid benefits paid. If the state is listed in the wrong position, the annuity is treated as a transfer.
• The contract’s design. An annuity purchased by or for the applicant is also treated as a transfer unless it meets IRS retirement-plan rules or is irrevocable, non-assignable, actuarially sound, and pays equal installments with no deferral and no balloon payment.

The payout period must also make sense in light of the applicant’s expected lifespan. A 15-year annuity sold to someone with a far shorter life expectancy mainly benefits heirs, and Medicaid treats it accordingly.

The retirement-plan exception can apply to products such as an individual retirement annuity. One defining tax-code feature is that the owner cannot transfer the contract.

Timing is another factor. Medicaid uses a 60-month, or five-year, look-back period before the application. A purchase made only a few months before filing falls squarely within that window.

If the widower bought a deferred annuity that names his daughter as beneficiary and allows cashing out, both features raise red flags under Medicaid transfer rules. The cash-out option creates another concern: the state may view the annuity’s available value as an asset he still owns. In either case, moving money into the contract may not shield it.

Spousal Annuities Are Treated Differently

Married couples have another route. Under Medicaid rules, a community spouse, meaning the husband or wife remaining at home, can be named ahead of the state as the annuity’s remainder beneficiary. Properly structured annuities can also turn countable savings into income for that spouse, helping preserve funds for living expenses while the other spouse receives nursing home care. Even so, the arrangement must meet the relevant Medicaid standards.

The federal rules do not work exactly the same in every spouse scenario, and state law fills in important gaps. Guidelines and estate-recovery rules vary by state, so a contract that works in one place may fail in another. Income rules also matter. In states that use income limits for long-term care Medicaid, a large annuity payment to the applicant can complicate eligibility, though some states allow qualified income trusts. And even after someone qualifies, much of their income may still need to go toward nursing home costs, with Medicaid covering the remaining eligible expenses.

Seven Contract Details That Determine Whether Medicaid Sees a Gift

A single clause can change the result. Before filing, families and attorneys often review the actual contract and check:

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

Applied to the widower’s situation, the warning signs are obvious: deferred payments, a cash-out right, and a daughter named where the state should be. Each issue can often be fixed before the money is moved, but doing so after the fact can be expensive.

An annuity usually works best as the final step in a Medicaid planning strategy, after the family has reviewed the applicant’s assets, the spouse’s needs, and the state’s rules. Used as the first move, a $1 million contract can create the very penalty it was meant to prevent. Structured carefully under state Medicaid rules, it may help address the asset issue without creating a new eligibility problem.