Journal of Financial Planning: August 2025
Dale Krause, J.D., LL.M., is a nationally recognized expert in Medicaid planning and the founder and CEO of Krause Agency (www.krauseagency.com), the leading provider of Medicaid compliant annuities. With more than 30 years of experience at the intersection of elder law and financial services, Dale has been instrumental in developing innovative asset preservation strategies that support attorneys, advisers, and their clients during long-term care crises. A former elder law attorney, Dale is credited with introducing the first Medicaid compliant annuity to the marketplace and continues to be a thought leader in the industry through frequent speaking engagements, educational programs, and professional publications.
As the cost of long-term care continues to creep upward, many seniors and their families find themselves unprepared for the financial burden. Fortunately, financial advisers can lighten the load by helping their clients protect their assets and obtain financial assistance for long-term care. One of the most effective yet often underutilized tools to achieve these two aims is the Medicaid compliant annuity (MCA).
This article aims to demystify MCAs, illustrate how they function within crisis Medicaid planning, and provide actionable guidance for financial advisers who want to ethically and effectively incorporate MCAs into their businesses.
Before diving into the intricacies of MCAs, we should first examine how they fit into the broader crisis planning landscape.
Understanding Medicaid and the Need for Crisis Planning
Medicaid has become a cornerstone of long-term care funding in the United States. With the median annual cost of a private room in a nursing home exceeding $100,000—and continuing to rise—it’s no surprise that many individuals exhaust their resources quickly when faced with prolonged care needs. Unfortunately, many clients mistakenly assume that Medicare will cover these expenses or that they’ll never need institutional care. When the reality hits, it’s often too late for preemptive planning, such as purchasing long-term care insurance.
This is where Medicaid crisis planning comes into play. It refers to the strategic repositioning of assets after a client or spouse experiences a medical crisis requiring long-term care. In these cases, time is of the essence, and planners must act quickly to protect assets while navigating complex Medicaid eligibility rules.
Medicaid imposes strict income or asset thresholds, which vary by state. For example, in most states, a single applicant and the ill spouse in a married couple must have less than $2,000 in countable assets to qualify. The spouse of a married applicant who does not require Medicaid may be able to retain more as a “Community Spouse Resource Allowance”—up to $157,920 in 2025 and depending on the state. Unfortunately, married clients are still often unprepared for how quickly their savings can evaporate when paying the monthly long-term care bill.
Digging Deeper into Medicaid Compliant Annuities
When clients or their loved ones suddenly need long-term care, they are often stunned by the cost and the strict rules governing Medicaid eligibility. Standard financial planning tools frequently fall short in these moments. Enter the Medicaid compliant annuity (MCA)—a highly specialized solution designed to navigate this narrow, high-stakes path.
Medicaid compliant annuities are single-premium immediate annuities (SPIAs) that convert a client’s excess countable assets into a stream of income, effectively removing the lump sum from Medicaid’s asset calculation. This tool can play a pivotal role in crisis planning, helping clients quickly meet Medicaid’s asset eligibility requirements while preserving financial resources for their spouse or future generations.
But not just any annuity will suffice. To qualify as Medicaid-compliant, the product must meet a specific set of criteria defined by the Deficit Reduction Act (DRA) of 2005 and interpreted at the state level. Understanding and adhering to these requirements is crucial for advisers recommending MCAs to clients in or approaching a crisis scenario.
Key Features of Medicaid Compliant Annuities
To be considered Medicaid-compliant, an annuity must satisfy all of the following conditions:
- Irrevocable and non-assignable. Once established, the annuity cannot be canceled, cashed out, or transferred. This provision ensures the funds are committed and not accessible for future spend-down, a core principle of Medicaid’s eligibility framework.
- Immediate and equal monthly payments. The MCA must begin paying out immediately and in equal installments—typically monthly—with no deferrals, lump sums, or balloon payments. This consistency helps states ensure the contract contains zero cash value.
- Actuarially sound. The annuity term must be structured so that the payout period does not exceed the annuitant’s life expectancy, as defined by the Social Security Administration’s Actuarial Life Table or a state-specific table. If the term is longer, the annuity is considered a transfer of assets for less than fair market value and may trigger a penalty period.
- State named as primary beneficiary. To protect public resources, the state Medicaid agency must typically be named the primary beneficiary to the extent of Medicaid benefits paid on behalf of the Medicaid recipient. This allows the state to recover funds after the recipient’s death, if applicable. Exceptions to this rule exist in certain states and in some cases involving a married couple or a minor or disabled child. In these cases, the state Medicaid agency may be named the contingent beneficiary.
An MCA that fails to meet one of these criteria could disqualify the applicant from Medicaid or result in a costly penalty. That’s why working with an annuity provider experienced in Medicaid planning—and coordinating closely with an elder law attorney—is essential.
Strategic Use Cases for MCAs
MCAs are especially effective in scenarios involving:
- Married couples where one spouse requires long-term care and the other remains in the community. The MCA can generate a reliable income stream for the healthy spouse while allowing the institutionalized spouse to qualify for Medicaid.
- Single individuals who would otherwise face a complete spend-down before achieving eligibility. An MCA can help these individuals preserve resources and access benefits more quickly.
In each of these cases, the MCA is both a tool to achieve Medicaid eligibility and preserve some of what they have left. It allows clients to avoid impoverishment and secure timely access to care within the boundaries of the law.
Two Practical Applications of an MCA
To better understand how MCAs work in practice, let’s look at two theoretical scenarios, each reflecting a different use case.
Scenario One: Protecting a Spouse’s Financial Security
John, age 80, and Mary, age 79, have been married for over 50 years and live on a fixed income. When John suffers a stroke and requires long-term nursing home care, Mary is faced with not only emotional turmoil but also the overwhelming cost of institutional care. The couple holds approximately $300,000 in countable savings and investments, well above their state’s Medicaid asset limit for a couple.
Without proper planning, Mary could be forced to spend down a substantial portion of their life savings, leaving her financially vulnerable for the remainder of her retirement. Concerned for her future, the couple turns to a financial adviser for help.
The planning team recommends an MCA. Since the couple can keep $150,000 under their state’s resource limitations, Mary purchases a $150,000 Medicaid compliant annuity using the couple’s excess countable assets. The annuity is structured to provide monthly payments to Mary over a 36-month term, which complies with her actuarial life expectancy and reduces the risk of her predeceasing the annuity. The funds are not considered as countable for John’s Medicaid eligibility, allowing him to qualify for benefits while preserving Mary’s financial stability.
In this case, John receives the care he needs without delay, and Mary continues to live independently with a reliable income stream for the length of the annuity. Most importantly, the couple can maintain dignity and peace of mind even in a life-altering situation.
Scenario Two: Facing Immediate Care Needs As a Single Individual
Sarah, a 74-year-old single woman, has lived a modest lifestyle with $150,000 in countable assets remaining and no long-term care insurance. A recent diagnosis of advanced Parkinson’s disease rapidly increases her care needs, and her family learns that a skilled nursing facility will be necessary, at a cost of more than $9,000 per month.
Initially, Sarah is disqualified from Medicaid due to her assets exceeding the eligibility threshold of $2,000. However, her financial adviser recognizes this as a Medicaid crisis planning opportunity. Rather than spend down the entire $150,000 on nursing care over the course of 16 months, her adviser proposes gifting about half of her assets to her adult children and funding the remaining amount into a Medicaid compliant annuity. Because of the gift, Sarah intentionally incurs a penalty period of Medicaid ineligibility. Her MCA term is structured over the length of the penalty period, and she’ll use the payments to cover her care costs before she achieves Medicaid eligibility.
The annuity pays Sarah monthly, and those payments are directed toward her care costs during her penalty period. After the penalty period ends and the MCA terminates, Sarah becomes eligible and begins receiving benefits.
This approach preserves a portion of Sarah’s resources through a gift to her children while ensuring uninterrupted access to care. Plus, should Sarah incur unforeseen expenses during this period, her children can use a portion of the gifted funds to cover any additional costs. The MCA not only bridges the financial gap but also alleviates the emotional burden on Sarah and her family during a medical crisis.
Integration into Advisory Practice
Financial advisers are uniquely positioned to assist clients in Medicaid crisis situations, but they must approach this role with a keen awareness of both legal and ethical responsibilities. Crisis planning is time-sensitive, emotionally charged, and often involves difficult decisions about asset transfers, spousal protection, and family dynamics.
Key Principles for Ethical Implementation
- Interdisciplinary collaboration. Medicaid planning, particularly involving MCAs, intersects with legal considerations that vary by state. Advisers should always collaborate with elder law attorneys to ensure compliance with Medicaid rules and understand the alternatives available in the client’s state and situation. This collaboration minimizes the risk of penalty or disqualification for the client and helps advisers make recommendations in their clients’ best interest.
- Thorough suitability assessment. Advisers must evaluate whether an MCA is appropriate based on a comprehensive review of the client’s financial picture, marital status, health prognosis, and care objectives. For instance, MCAs may be more suitable for clients with modest financial resources. Those with a higher net worth may be able to privately pay for the care they need or use trust-based planning. Plus, Medicaid has income limits for eligibility, which may be exceeded by Social Security and other pension benefits for clients who had higher earnings during their working career, and the MCA income payable to the Medicaid applicant also counts toward this limit.
- Transparent communication. Clients and their families should fully understand the nature of the annuity, including its irrevocability, state recovery provisions, and income structure. Advisers should document these discussions carefully to ensure clarity and protect all parties involved.
- Avoiding conflicts of interest. Advisers must remain objective, even when commission-based products like MCAs are involved. Recommendations should always be in the client’s best interest, not influenced by compensation. Some states and professional organizations require disclosure of potential conflicts, and advisers should err on the side of transparency.
- Staying informed and compliant. Medicaid policies, especially those governing annuities, are subject to change at both the federal and state levels at any time. Advisers must remain educated and adapt their practices as regulations evolve. Participation in continuing education, compliance webinars, and events related to the senior market and Medicaid can be immensely valuable.
By following these practices, financial professionals can ethically and confidently incorporate MCAs into their services, providing clients with real solutions when they need them most.
Conclusion
Medicaid compliant annuities represent a powerful tool for financial advisers assisting clients in navigating the complexities of long-term care planning during a crisis. By converting excess assets into a structured income stream, MCAs may enable clients to qualify for Medicaid benefits while preserving financial resources for spouses and heirs.
As the landscape of long-term care planning continues to shift, advisers equipped with knowledge of MCAs and their strategic application have the opportunity to provide invaluable support to clients facing some of life’s most challenging decisions.