Do You Find Annuities Confusing?

FROM www.medicaidannuity.com:

You're not alone. If you're not an insurance agent annuities can be confusing. I'm frequently asked questions regarding the difference of annuities, and how the difference kinds are treated for eligibility purposes. What purpose do they really serve? What kind is appropriate? How do you tell the difference between all the types?

Why Use an Annuity?
The primary reason for using an annuity is to convert excess assets into an income stream. Thus, the problem assets, whether they consist of cash, checking and savings accounts, stocks, bonds, mutual funds, cash value life insurance, or an IRA, can be converted into an annuity, without jeopardizing eligibility. Additionally, using certain types of annuities can provide a safe investment vehicle when preplanning for Medicaid or gifting assets.

Immediate Annuities
An immediate annuity is a financial contract that delivers regular payments from an insurance company to the payee that begins soon after the signing of the contract - there is no accumulation period. For Medicaid purposes, if the immediate annuity meets certain restrictions outlined in the Deficit Reduction Act of 2005, it is considered income only. For Veterans Benefits purposes, an immediate annuity is considered income only regardless of its provisions.

Tax-Deferred Annuities

A tax-deferred annuity is an investment with an insurance company which continues to grow until the owner makes a complete withdrawal or annuitizes the contract. Established under § 403(b) of the Internal Revenue Code, tax-deferred annuity owners have the opportunity to accumulate funds on a tax-deferred basis. Contributions and the investment returns can grow quickly in that taxes are deferred until the owner receives the funds. For Medicaid and Veterans Benefits purposes, a tax-deferred annuity is a countable asset, which becomes part of the applicant or spouse's net worth. Tax-deferred annuities are primarily used as investment vehicles in preplanning for Medicaid, or in gifting assets.


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"I Have to Make Medicaid a Beneficiary?!"

From Krause Financial (www.medicaidannuity.com): Link at end of article...

"Then what's the point of using a Medicaid Compliant Annuity?" I hear this quite often, in both working with newer elder law attorneys and families of the elderly.  With the state Medicaid agency required to be a beneficiary, then doesn't it make the purchase moot?

Not necessarily.  Consider these three common planning scenarios:

1: Individual Gifting Scenario.

An individual makes a gift and purchases a Medicaid Compliant Annuity.  The Medicaid Compliant Annuity is structured to provide income throughout the divestment penalty period associated to the gift.  Designating the state Medicaid agency is one of the requirements for the purchase of the Medicaid Compliant Annuity not to be deemed a transfer for less than fair market value.  However, in the event the individual predeceases the Medicaid Compliant Annuity, the Medicaid agency would not be entitled to any of the residual benefits remaining in that the agency did not provide any medical assistance benefits to the individual due to the divestment penalty period.  As such, the individual's intended beneficiaries would be entitled to receive any residual benefits remaining in the Medicaid Compliant Annuity.

2: Individual with a Diminished Longevity.

In a case where an individual has a very short life expectancy a stand-alone Medicaid Compliant Annuity may provide a greater advantage than a gifting plan (aka a half-a-loaf plan).  By purchasing a Medicaid Compliant Annuity over the individual's life expectancy, he or she is immediately eligible for Medicaid benefits.  The Medicaid Compliant Annuity payout becomes the applicant's Medicaid copay.  This type of planning is traditionally only advised if the applicant is expected to life for 12 months or less.  When the individual predeceases the Medicaid compliant Annuity, the state Medicaid agency is entitled to recover from the residual benefits up to the amount of Medicaid paid on behalf of the applicant.  If the individual passes shortly after the annuity has commenced, the state's claim amount will be very small, leading to a greater remainder amount for intended heirs.  But why even proceed with the annuity?  Why not just continue to privately pay until the individual passes? Because the state's claim amount will be at the Medicaid rate, not the private pay rate.  Even after repaying the state Medicaid agency, the family will have paid less than had they done zero planning at all.

3: Spousal Medicaid Compliant Annuity Planning.

In a traditional community spouse case, funds in excess of the community spouse resource allowance will be structured in a Medicaid Compliant Annuity owned by the community spouse.  The community spouse is usually entitled to keep all income, regardless of the amount.  However, the community spouse is also usually required to designate the state Medicaid agency as a beneficiary up to the amount of Medicaid benefits paid on behalf of the institutionalized spouse.  In light of this, should the community spouse predecease the Medicaid Compliant Annuity the state Medicaid agency is able to reocver what has been paid on behalf of the institutionalized spouse, leaving very little to potentially be transferred to intended heirs.  Due to this fact, more and more community spouse Medicaid Compliant Annuities are seeing shorter terms, dependent on the anticipated longevity of the community spouse.

As you can see, in most cases it is not a "lost cause" to utilize a Medicaid Compliant Annuity, even though the state Medicaid agency does need to be designated as a beneficiary. 

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