Using Annuities for Long-Term Care Planning
From: elderlawanswers.com
Insurance agents and financial institutions often advertise annuities as the perfect way to generate retirement income. While annuities can be a valuable retirement tool, if you are buying an annuity as part of a Medicaid planning strategy, you need to fully understand what you are getting. And whether an annuity makes sense as part of Medicaid planning may depend on whether you are married or single.
Historically, “immediate” annuities have been used as a Medicaid planning tool. In its simplest terms, an immediate annuity is a contract with an insurance company (or a private individual) under which the consumer pays the company a certain amount of money and the company sends the consumer a monthly check for the rest of his or her life. Purchasing an immediate annuity is a way for people with assets in excess of Medicaid’s limits to turn the assets into an income stream while avoiding a penalty for transferring the assets. The Deficit Reduction Act of 2005 (DRA) changed the requirements for annuities, making it a little harder to do this. Under the DRA, an annuity must meet the following requirements in order to avoid a transfer penalty.
- The annuity must be irrevocable (meaning you can’t cancel it)
- The annuity must be actuarially sound (which means the annuity cannot cover a term longer than the purchaser’s life expectancy and the payments expected during the annuitant’s life expectancy must at least equal the cost of the annuity)
- The payments must begin immediately (you cannot have deferred payments or a balloon payment)
- Unless there is a spouse or a minor or disabled child, the state must be named as the remainder beneficiary (the person or entity that gets any leftover money) up to the amount of Medicaid provided
Perhaps the best use of an annuity for Medicaid planning is for married couples, one of whom needs Medicaid-covered long-term care. An immediate annuity allows the couple to turn their excess assets into income for the Medicaid recipient’s spouse. If a spouse purchases an annuity that meets the requirements under the DRA, he or she will receive the income from that annuity without having to contribute it to the Medicaid recipient’s long-term care. But, as a result of a 2006 amendment to the DRA, the spouse will have to name the state as the remainder beneficiary for costs incurred by the Medicaid recipient as well as herself if she ever receives Medicaid. However, such repayment would only occur if she were to die before the guaranteed payments under the annuity had expired.
Annuities generally have been less useful as Medicaid planning devices for single individuals. For example, if a single individual purchases an annuity, the interest income from the annuity counts as income and will have to be paid to the nursing home. Then, once the purchaser dies, any remaining money in the annuity will first go to the state to pay any unpaid nursing home bills. If there is any left over, it will go to beneficiaries named by the purchaser.
However, in some states immediate annuities may have a place for single individuals who are considering transferring assets. Income from an annuity can be used to help pay for long-term care during the Medicaid penalty period that results from the transfer. In such cases, the annuity is usually short-term, just long enough to cover the penalty period.
While immediate annuities can still be a powerful tool in the right circumstances, they must be distinguished from deferred annuities, which have no Medicaid planning purpose. Also keep in mind that even following the DRA, acceptance of immediate annuities for Medicaid planning varies from state to state. Be sure to consult with a qualified elder law attorney in your state before pursuing this strategy.
