We have seen a significant increase in the use of annuities among our elderly clients.   We have people in their late 80s coming to us with annuities that are less than a few years old and are still in “penalty” — meaning that getting access to these funds will result in a “surrender” charge which in the early years of the contract is quite significant.   It is understandable, in this era of low interest rates, for people to seek out the highest return.   An annuity offering 3 percent guaranteed return looks really good compared to a CD paying a couple of points less.

What people don’t think about is what happens if they really “need” the money.  Clients are told they can access 10% of the value per year without penalty.   “Why would you ever require more than this?” they are told.  The answer is that it is needed when you have an illness that results in long term care.   Annuities are considered “available” resources whether you can only get 10% or nothing at all.   Some clients are sold these products and are told that the principal can’t be touched if they become ill.   Sometimes we have people who have been advised that there are “provisions” in the policy that makes it exempt from consideration for medical or nursing home expenses.  Neither is true.  The state looks at these assets as if they were cash.  Spousal protection dictates that all assets are moved to the community spouse.  Moving an annuity from the husband’s name to the wife’s name will require that the policy be cashed and may result in the assessment of a surrender charge.  There are some contracts that will forgive these charges for nursing home residents.  These provisions, however, are not in every annuity.

The story is also complex for annuities in “payout” mode – known as “immediate” annuities.   These are nice options since they take resources and make them into income thereby qualifying someone for Medicaid or VA benefits who would be otherwise ineligible because of excess resources.   The use of annuities for this type of planning is possible but you must be VERY careful when doing so.   The rules are strict and must be followed precisely.  The annuity must be “actuarially” sound — that means, among other things, it must pay out within the life expectancy of the annuitant calculated pursuant to the Social Security tables.   If the annuity is payable to an individual who subsequently needs nursing care and applies for Medicaid, the income from the annuity must go to the facility.  If the annuity is paid to a spouse of an applicant, it must not exceed (when added to the spouse’s income) the monthly maintenance allowance calculated by Medicaid.    In all cases, the Commonwealth of Pennsylvania, Department of Public Welfare should be a contingent payee to the extent of Medicaid paid out for the applicant

An immediate annuity used for Medicaid purposes must be “irrevocable.”  This means that the contingent payee (state) cannot be changed after the policy is issued.  If there is any chance that the annuity can be altered, you might be facing a denial from Medicaid.

When the application for the annuity is made, make sure that you specify how much the Commonwealth of Pennsylvania is entitled to – not that they are simply a contingent payee.  Indicate that the state is ONLY entitled to payback for their Medicaid expenditures and indicate whose Medicaid.  Make sure that the application is clear about who will receive the monthly funds.

Don’t just buy “Medicaid Compliant” annuities.  Some companies have different ways of defining these products.  The proper policy should state clearly that the policy is immediate, irrevocable and payable within the life expectancy of the annuitant.  It should clearly indicate the beneficiaries.  If the beneficiary designation is not complete you might face the prospect of having the money paid to the annuitant’s estate.   This will cost the client more time and money.

Understand what happens after the death of the annuitant.  Confirm this with the company and with the state if need be.  The state does not get paid back in a lump sum.  The state receives the same payout as the annuitant did.  If the annuitant was getting $250 a week, the state gets the same amount until it is fully paid back for its Medicaid payments.  This means the family or the community spouse (spouse not in a nursing home) may have a long wait to get any extra money.  Plan for this in advance!

TIP! Consider making the state an irrevocable payee but the payees after that revocable.  This would permit flexibility in planning.

TIP!  If a spouse enters a nursing home his or her IRA is “available” as a resource.   One idea that may be used is to transfer the IRA to an immediate annuity that is actuarially sound and consistent with the rules described above.  This will save taxes and possibly save some of the money in the IRA from the cost of care.

Don’t assume anything when looking at an annuity in planning for a nursing home admission.  It is important to tread very carefully when purchasing an annuity in this area.  If these products are used correctly, they are a good tool – surprisingly good and surprisingly fair when it comes to couples where one is facing a long term care admission.  In some cases, it may be the only option for keeping the spouse at home safe or providing single individuals with options for long term care.

mm About Leonard L. Shober

Leonard L. Shober has focused a quarter century on representing clients in their estates and tax matters. He began his legal career in an estate planning practice. However, his interest in taxes and estate planning led him to pursue a Master of Laws (LLM) from Temple which he completed in 1994. Len continued his estate and tax practice which ultimately led to a focus on the needs of the elderly and disabled. At Shober & Rock, Len focuses on elder law, tax and estate planning and estate and trust administration.

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