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Almost all sellers of annuities will recommend the purchase of “deferred” annuities. However, a “deferred” annuity cannot be used for Medicaid planning or for purposes of preserving you asset from the cost of nursing home care.

Life Care Planning, Estate Protection, Disability,
VA & Medicaid Assistance Lawyers

Using Annuities for Long Term Care Planning

Using Annuities for Long Term Care Planning

 

Insurance agents, financial institutions, "certified senior advisors" and others 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 or asset protection planning strategy, you need to fully understand what you are getting. And whether an annuity makes sense as part of Medicaid or asset protection planning may depend on whether you are married or single.

 

Almost all sellers of annuities will recommend the purchase of "deferred" annuities. However, a "deferred" annuity cannot be used for Medicaid planning or for purposes of preserving you asset from the cost of nursing home care.

 

Until February 2006, "immediate" annuities have been used by some as a Medicaid planning tool.  In its simplest terms, an "immediate" annuity is a contract with an insurance company 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 individual's excess non-exempt assets into an income stream and also avoiding a penalty for transferring the assets.

 

The Deficit Reduction Act (DRA), which was effective February 8, 2006, changed the requirements for annuities, making it a little harder to use an "immediate" annuity. 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 - provided the couple's combined income does not exceed the Community Spouse Maintenance Needs Allowance ($2,541 as of January 1, 2007).

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 spouse who is the Medicaid recipient.

 

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, only then will any remaining money in the annuity go to beneficiaries named by the purchaser.

 

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.

 

Richard Habiger is an elder law and special needs planning attorney.  You may contact him at 618-549-4529 or Richard@HabigerElderLaw.com.