Annuity Purchase can Protect Assets

To qualify for Medicaid benefits, assets of a married couple exceeding the allowance for community spousal resource, as well as income exceeding the determined minimum monthly maintenance needs level must be unavailable for a sick spouse become eligible at an early date. Practitioners often find that good cause exists for obtaining a court-ordered increase of the minimum monthly maintenance needs level. Realistic needs of the well spouse should be examined to determine if this strategy is possible. Asset spend-down is available, but is not very attractive to the proponent of wealth preservation unless the expenditure is used to increase the value of an exempt asset. The annuity has become a more appealing approach. There are many annuity planning options which need to be analyzed for their relative advantages and disadvantages. The tax impact of liquidating assets to convert them to an annuity must be evaluated as well.

Medicaid guidelines for the use of annuities, which clarify OBRA '93, have been published by the Health Care Financing Agency. Under these guidelines, annuities must not be guaranteed for a period longer than the actuarial life expectancy of the annuitant (either the institutionalized individual or the community spouse). If they are, the payments that are guaranteed to be made later than the end of the actuarial life expectancy represent a transfer and will be penalized as such when the annuity is established. To avoid transfer penalties, guarantee periods of annuities must take into account the new guidelines concerning actuarial life expectancies.

In Medicaid planning, immediate income annuities (under which a client's funds are transferred to an insurance company in exchange for the promise of a stream of future periodic payments) are the type of annuity most often selected in Medicaid planning.

Types of annuities

There are several kinds of immediate annuities, not all of which make payments for life. But all immediate annuities provide for periodic payments that are predetermined and specified when the contract is negotiated. Payments are made at various set intervals at least once each year, and any one contract must last for a period greater than one year.

Immediate annuities are usually irrevocable contracts. Once the annuity has been purchased, the owner does not have the right to revoke the contract and obtain a refund (except for a "free-look" period of usually the first 30 days after purchase), Irrevocable annuities are necessary for the Medicaid planning approaches discussed in this article. Immediate annuities are afforded tax advantages in that a portion of each payment is treated as a return of capital while the balance is considered a payment of interest. Types of immediate annuities include the following:

1. Life only immediate annuities

This is an annuity under which the insurer promises to make periodic payments to the beneficiaries for the life of the annuitant. This kind of annuity produces the largest periodic payment among annuities that are guaranteed and continue for the life of the annuitant. No provision is made for heirs because the contract terminates on the death of the annuitant, and all remaining principal is retained by the insurance company. Accordingly, a substantial loss is incurred if the annuitant dies early. As a result, this type of annuity is used most often by clients who require higher, guaranteed payments for the rest of their lives and are comfortable invading principal while they are alive. For Medicaid planning purposes, "life only" annuities are generally advisable only in the case of a married couple who have no heirs or whose heirs have been given other assets.

2. Life annuities with refund provisions

Providing for heirs becomes possible if the annuity contract is for a period certain (continuing for the greater of the life of the annuitant or a stipulated time period), or if it provides for a refund (guaranteeing total annuity payments at least equal to the premium received by the company). To qualify under the Medicaid guidelines, the period of the guarantee cannot be longer than the actuarial life expectancy of the annuitant.

3. Period certain annuities

These annuities have no life component. The period of the annuity payments is predetermined and does not depend on the survival of the annuitant. The payment is guaranteed and will be made either to the original beneficiary or, in the event of the original beneficiary's death, to contingent beneficiaries named in the policy. Therefore, the owner is assured of no loss in the value of his estate due solely to an early death. Under OBRA '93, the guarantee period must be no greater than the stated actuarial life expectancy.

4. Staged or "Balloon" annuities

Payments under this kind of annuity–instead of being level–are structured to increase at some agreed upon rate, resulting in lower payments in the earlier years and higher payments later. The structure is determined after taking into consideration share of cost aspects, anticipated changes in other income, special needs, and life expectancy.

Examples of the effectiveness of a staged, period certain annuity demonstrate the creative Medicaid planning techniques available:

Example:

A single individual (female, age 85) has a realistic life expectancy of less than five years although her actuarial expectancy is more than six years. She owns $100,000 of excess assets (i.e., in excess of the limits permissible to qualify for Medicaid). The annuitant purchases a $100,000 annuity for five years certain, with monthly payments of $490 and a final lump-sum balloon payment of $95,000. The client qualifies for Medicaid because the annuity is an unavailable asset, but in case of death during the annuity period, her heirs will receive the remaining payments as well as the final payment of $95,000.

Example:

A married couple own $20,000 in excess assets. The institutionalized spouse (male, age 82) has income of $1,300 per month, and the community spouse (female, age 78) has a monthly income of $400. The couple purchase a period certain annuity that pays $150 per month for a five-year period certain plus a final balloon payment of $15,000. This arrangement allows Medicaid eligibility for the institutionalized spouse while permitting allocation of the institutionalized spouse's excess income to the community spouse in order to keep within the monthly minimum maintenance needs allowance. Again, under OBRA '93 guidelines, the guarantee period of the annuity must be no greater than the stated actuarial life of the annuitant.

Insurance Agents & Brokers ONLY! (not intended for the General Public)

Insurance Agents & Brokers ONLY!
(not intended for the General Public)