Lack of foresight could exclude your client from the program.
Medicaid, the state and federally funded public
assistance program, might be off the radar screen for financial
advisors selling annuities to senior clients for retirement planning.
It shouldn't be, attorneys say. Problems could arise if a client needs nursing home care and runs out of money. The wrong kind of annuity could prevent him or her from qualifying for the program that funds more than half of the nation's long-term care.
On the other hand, a client may be able to keep certain types of annuities and still qualify for Medicaid. But the hodgepodge of state and federal rules governing Medicaid is changing faster than elder law attorneys can track. As states and Congress feverishly search for ways to cut the mounting budget deficit, many attorneys predict that the heavily promoted Medicaid annuity loophole might soon be cut further. Plus, even the right Medicaid-eligible annuity could be wrong for your client's circumstance.
"We've had situations where people bought deferred annuities and were denied Medicaid," says Deerfield Beach, Fla., elder law attorney Jerome Ira Solkoff. "They [were] sold the wrong things. We've had situations where people thought they needed immediate annuities and didn't need to have such exotic investments." In Florida, an annuity is just one of 38 Medicaid planning options available to help protect assets in a husband-and-wife situation, Solkoff says.
Protecting your client's assets for long-term care is critical. Tapping into assistance from Medicaid can save many the average $72,000 annual bill for a nursing home. But to qualify for Medicaid, assets typically must be "spent down," to $2,000 to $3,000 in assets, depending on state law, Solkoff says. The patient's "community spouse" also must have state-limited assets-often $95,100.
In most states, for an immediate annuity to be considered an exempt asset for Medicaid, it generally must meet these conditions:
It must be irrevocable and nonassignable. This means it can't be redeemed or sold. "So all deferred annuities are countable as assets for Medicaid," notes Jeffrey Bloom, elder law attorney for Margolis & Associates, in Boston. This rule also eliminates some of the latest immediate that give a policyholder the option to withdraw cash are countable as assets. Typically, immediate annuities are irrevocable contracts.
It must be actuarially sound. "An annuity has to pay you back, in theory, the entire purchase cost within the life expectancy set forth in tables promulgated by Medicaid," says Peter Strauss, elder law attorney with Epstein Becker & Green P.C., in New York. Beware, he says-federal mortality tables used for tax purposes or commercial tables won't work.
Failing to carefully disclose important information about an annuity to a client who is running out of money and could soon need Medicaid could get advisors in trouble with regulators, some say. Others say it could cause an advisor to run afoul of a growing number of suitability regulations. The problem: Many who may need the income from an immediate annuity really don't know if they will go into a nursing home in the near future.
"Other than straight life, annuities should not be sold to seniors who are sure they will need Medicaid nursing home care," Norse Blazzard, a Deerfield Beach, Fla.-based attorney and former chairman of the National Association of Variable Annuities, warns. "The suitability problem for annuities is when they are to be sold and what information the salesperson has about the intentions of the purchaser."
Even if you think you're selling an actuarially sound immediate annuity, there might be other issues to consider. For example, actuarially sound annuities may not be permitted protections for the community spouse in several states, including Alabama, Arkansas, Idaho, Colorado, Connecticut, New Jersey, Nevada and Wisconsin, according to ElderLawAnswers.com.
B. Douglas Hayes, a Goshen, Ind., attorney, says that starting this year Indiana will attempt "estate recovery" from Medicaid-qualified annuities. This means the state now has the ability to recover from the annuity what Medicaid benefits it already paid for a senior. "It (an annuity) used to be a good planning tool for a single individual in a nursing home, but it has limited usage now," Hayes says.
Michigan has a "waiver" program allowing people to receive Medicaid assistance to stay in their homes, notes East Lansing elder law attorney Douglas G. Chalgian. "That has an income cap." So an immediate annuity could well put a client seeking home-based, long-term care over the income limit for Medicaid assistance, he says.
Plus, Chalgian says, Michigan nursing home patients must contribute a "patient pay amount" or co-pay to the nursing home with an annuity. As a result, annuities may not be as attractive as other strategies, such as trusts and transfers.
Immediate annuities sold with joint and survivor payout benefits or period-certain options could also become problematic. Joint-and-survivor payouts on annuities, Solkoff notes, can be a "double-edged sword." The spouse who winds up in the nursing home could have too much in assets for Medicaid. So could the community spouse.
Private annuities could present a problem. "States are leaning toward outlawing immediate and deferred annuities if a family member is acting as an insurance company," Solkoff says.
New York attorney Strauss says that he is concerned about gift and lifetime annuities sold by charitable organizations. "When you sell an annuity, you're locked in," he says. "If you suddenly find significant health care expenses and other needs, how do you get your money back?"
Elder law attorneys say they often have to undo deferred annuities so that their clients can qualify for Medicaid. This may require that their clients pay steep surrender fees. Or, annuities may be converted to actuarially sound immediate annuities for Medicaid.
"I hate seeing advisors push deferred annuities too much," Indiana attorney Hayes says. "I've had clients where the penalties for early withdrawal were not explained real well. Financial advisors put themselves at risk pushing annuities without adequately informing customers."
The National Association of Insurance Commissioners, which has been trying to get model senior citizen suitability rules adopted nationwide, does not specifically address Medicaid issues.
Yet there are issues with annuities that are sold specifically as Medicaid-exempt. In fact, the term, "Medicaid annuity," found on Web pages of financial planners and insurance agencies, causes Alice Gates, senior staff attorney for the California Department of Insurance, to bristle. "They better not use that (phrase) here," she says.
"Every state for the last 15 years has been having an enormous amount of problems with people using up their life savings to purchase an annuity," Gates says. "They suddenly needed to go into a nursing home or they needed access to the funds and the funds are no longer liquid. The children will call us and complain that it's costing the person thousands of dollars (in surrender fees)."
California specifically addressed Medicaid in its senior protection bill that took effect January 1, 2005. So far, Gates says she knows of no complaints under the new law. An annuity should not be sold to a senior in California, according to Gates, if the senior's purpose in purchasing an annuity is to affect eligibility for Medi-Cal, the state's Medicaid program and:
The purchaser's assets are equal to or less than the community spouse's resource allowance.
The senior would otherwise qualify for Medi-Cal.
After the purchase of the annuity, the senior or senior's spouse would not qualify for Medi-Cal.
A violation, she says, could result in the issuer rescinding to the senior the premium, fees and all costs paid for the annuity.
Meanwhile, in Florida, Solkoff says the attorney general's office recently examined an annuity-related ad by an insurance agency advertising qualification for Medicaid. Civil or criminal fraud was implied, he says.
"My understanding is that California has looked into whether unlawful annuities are being sold to individuals to get Medicaid eligibility," says Spencer Levine, director of the Florida's Medicaid fraud control unit. "That's of interest to us. We're trying to get intelligence and information from those in the Florida bar. If we don't have jurisdiction, we will send it to whoever has appropriate jurisdiction."
Solkoff cites yet another area of controversy concerning Medicaid planning and annuities: Lawyers in an increasing number of states are forming subsidiary businesses, selling insurance and annuities.
The Florida bar, he says, permits this as long as the relationship is disclosed to the client. "I don't do that," he says. "I think it's a conflict of interest."
Advisors looking to sell annuities to seniors might check in with an elder law attorney in their state concerning Medicaid issues. The National Elder Law Foundation at www.nelf.com, issues a "Certified Elder Law Attorney (CELA)" designation that indicates an extra level of training.