A recent court decision may make it easier for seniors to use short-term, immediate annuities to qualify for Medicaid more quickly.

In general, people who go to a nursing home must spend down their resources before becoming eligible for Medicaid. If you transfer your assets rather than spending them down (such as by making gifts to family members), that triggers a penalty period during which you’re ineligible for Medicaid benefits, even if you would otherwise qualify.

If one spouse goes into a nursing home, the other spouse is generally allowed to keep a certain amount of assets to live on. However, if a couple owns more than this “asset allowance,” they must spend down any additional assets before applying.

Here’s where annuities come in: The idea is that a couple could take any assets they have above the asset allowance, and use them to purchase a short-term immediate annuity. This would allow the couple to qualify for Medicaid right away, but still provide a regular source of income to the spouse who is not in a nursing home in addition to the standard allowance.

In cases where seniors have made a large family gift, and thus are facing a period of ineligibility, buying an annuity could also effectively “spend down” their assets right away, allowing them to benefit from Medicaid more quickly while also receiving annuity income to tide them over during the penalty period.

In the recent court case, a woman named Donna Claypoole spent about $84,000 to buy a short-term annuity, planning to use the proceeds to help pay for her nursing home care during a 14-month ineligibility period caused by an earlier family gift.

The state of Pennsylvania objected, and claimed the annuity was a further transfer of Donna’s assets that should trigger an additional penalty period during which she was ineligible for benefits.

But a federal appeals court sided with Donna, and said the annuity was okay.

Pennsylvania’s argument was that annuities like Donna’s – for a term much shorter than the owner’s life expectancy – are a sham transaction designed simply to skirt the rules.

But the court said the exact opposite was true: Annuities that are much longer than a person’s life expectancy should trigger a penalty, because they’re a disguised way of trying to leave assets to one’s heirs. According to the court, though, there’s nothing in the Medicaid laws that prohibits using short-term annuities in the way Donna did.

The ruling is technically binding only in Pennsylvania and a few other states, but it’s a very important test case nationally, and it suggests that this technique might become widely available to help many seniors.