A Safe Harbor annuity is a Single Premium Immediate Annuity (SPIA) designed to meet the strict requirments of the federal Medicaid rules outlined in the Deficit Reduction Act of 2005 (DRA) commonly referred to by Medicaid Planners as the "Asset-to-Income Rule".
The purchase of the Medicaid compliant SPIA allows somoene to take assets that would otherwise have to be spent down and convert it -- through the purchase of the SPIA -- into an income stream. In most cases, this is done to help support a Community Spouse or to enhance the Community Spouse's income.
The most common features of a Safe Harbor annuity are:
Irrevocable - The annuity, once implemented, cannot be revoked or changed in any way.
Non-Assignable - The contract cannot be assigned or sold to a third party.
Level Payments - The annuity contract must pay out in substantially equal installments over the term of the contract, no balloon payments are allowed.
Actuarially Sound - The payment duration is a fixed term of months or years based upon the owner's life expectancy. Most states follow the Social Security life expectancy table; however, some states have adopted an older version of the table.
State as Beneficiary - Depending on the circumstances, the state may need to be named as the primary or contingent beneficiary of the contract in an amount up to the total cost of care paid out by the state on behalf of the institutionalized individual.
When the annuity meets all of Medicaid's requirments, the purchase of that annuity does not create a transfer penalty, nor is the annuity considered an asset of any value. It is only considered to be a stream of income -- akin to a pension -- to whomever recieves the payments. That is why many Medicaid Planners use these annuities to convert excess resources into an income to help their clients qualify for long-term care Medicaid assistance.
The most common use of a Safe Harbor annuity is to complete the Medicaid spenddown for a married couple with a spouse in the community.
For example, take Ron and Debbie. Ron goes into a nursing home and Debbie is the Community Spouse. The couple has $300,000 in countable assets on the date that Ron enters the facility. Medicaid would make them spend those assets down to $119,220, which is the maximum Community Spouse Resource Allowance (CSRA). At $10,000 per month for the cost of a nursing home, the majority of Debbie's retirement nest egg will be wiped out in less than 2 years.
Medicaid will help pay for the cost of care after Ron and Debbie spend down to the $119,200 asset limit. To solve the problem, Ron and Debbie's Medicaid Planner reccomends the purchase of a $181,000 Medicaid Safe Harbor annuity. Debbie can keep the $119,220 as her CSRA, and keep all of her income from the annuity and all other sources. Ron's income will go to pay for care. Becasue Debbie's assets are no longer factored into Ron's Medicaid eligibility after she has completed the spenddown and he has been approved for Medicaid assistance, she can re-accumulate her income. If there are any funds left in the annuity when she pases away, the payments will continue on to the beneficiaries named in policy.