Annuities: Watch Out!

A lot of our clients have Annuities among their assets.  An annuity is a relatively low-risk investment product, where the insured (usually, an individual) pays a life insurance company a lump-sum premium at the start of the contract. That money plus a return is paid back to the insured in fixed, incremental amounts, over some future period (predetermined by the insured). The insurer invests the premium; the resulting profit funds the payments received by the insured and compensate the insurer. Conventional annuity contracts provide a predictable, guaranteed stream of future income for retirement, etc. until the death of the beneficiaries named in the contract, or, until a future termination date, whichever occurs first.

Annuities are different animals.  Buyers of annuities are often faced with hefty penalties when they try to get all or some of their money out of their annuity in advance of its regular, agreed payment schedule.

What makes them even more unusual is that they have their own set of rules when it comes to qualifying for Texas Long Term Care Medicaid. The following is an analysis of several scenarios involving annuities and their treatment under Medicaid law.

Deferred Annuities. A deferred annuity is an annuity where the income is not paid to the insured (buyer) until some future date.  Deferred annuities have no place in Medicaid planning. Example: Mom has $85,000 in his savings account and $1,500 in her checking account. Mom has been admitted to the nursing home, and her family wants to protect the assets and qualify for Medicaid. Mom uses the $85,000 and purchases an $85,000 deferred annuity.  (The plan was to get the money out of their hands, i.e. convert it to a non-countable resource, so that they could qualify under Medicaid’s Asset Test, but keep the income for themselves by having it paid back in the future, presumably after Mom had passed away….bad idea.)  Mom then applies for Medicaid because she has less than $2,000 in her bank account. Mom is denied Medicaid eligibility because she owns the deferred annuity. The result will be that Mom has to surrender the annuity and pay significant surrender penalties, and then “spends-down” all of the money she received from the annuity less the penalties. Then, after she spends all of the remaining funds she would be eligible for Medicaid.

Single Person with Immediate Annuity. An immediate annuity is annuity where the income is paid to the insured (buyer) almost immediately.  John has $101,000 of savings and is about to enter a nursing home. He spends $100,000 and purchases an immediate annuity which pays John $1,000 per month for his lifetime. The immediate annuity is not considered a countable resource. John then applies for Medicaid because he has less than $2,000 of Countable Resources. John will pass Medicaid’s Asset test, but he must assign all of his income to the nursing home.  John's $1,000 monthly income from the annuity will go straight to the nursing home.  John has qualified for Medicaid by converting the cash into a non-countable resource, but, John’s family will not get any benefit from John owning an immediate annuity.

Married Couple with Immediate Annuity and Both Spouses in the Nursing Home. Same thing as the second scenario above. A married couple with both spouses in the nursing home will qualify for Medicaid if their combined assets are less than $3,000, but they must assign all of their income to the nursing home. They will qualify for Medicaid, but they will not receive the income from the annuity.

Married Couple with Immediate Annuity and Only One Spouse in the Nursing Home.  Mom is in nursing home. Dad stays in their residence. Mom and Dad have $215,000 of Countable Resources. The annuity salesman sells Dad an immediate annuity for $100,000 in an attempt to reduce Mom and Dad's assets below the Community Spouse Resource Allowance. Now, Mom and Dad have Countable Resources of only $115,000 and Dad has a monthly income stream. While Mom may qualify for Medicaid, the law provides that, the annuity must name the State as the remainder beneficiary for the total amount of Medicaid assistance paid on behalf of the institutionalized individual... If the state is not named as a remainder beneficiary in the correct position, the purchase of the annuity will be considered a transfer for less than fair market value.

Be very careful before purchasing an annuity as part of your Long Term Care Medicaid planning.  In some situations, the buyer of the annuity can end-up worse off than if he or she had simply maintained the cash.