People often seek immediate annuities because they want a steady income. However, financial advisors talk up another benefit as well: Such annuities may allow clients to qualify for Medicaid-a poverty program-even if they are well-heeled.
While that might seem an odd need, consider that an immediate annuity complying with Medicaid rules can save your clients money on nursing home costs, which can reach $75,000 or more annually. It could also help them save on the average $3,100 per month they would pay for an assisted-living facility. Beyond Medicaid, an immediate annuity can furthermore help veterans meet asset thresholds for Veterans Aid and Attendance pension benefits that help pay for assisted-living facilities.
Medicaid will not pick up a nursing home tab until a client's assets have been spent down to some amount, typically $2,000 to $3,000, depending on the state you live in. Veterans Aid and Attendance pension benefits may not kick in until a client's assets have declined to less than $30,000 or so. That's where the immediate annuity can help-it may allow clients to convert assets to an income stream that falls beneath the state and federal threshold requirements.
States have long challenged this practice, but a newer federal law has set some ground rules for Medicaid applicants, making state challenges more difficult.
Dale M. Krause, a De Pere, Wis., elder law attorney and insurance agent, has made these types of annuities his specialty. His company, Krause Financial Services Inc., has seen its Medicaid and veterans annuity business double since 2005. He attributes that growth to the advent of so many assisted-living facilities and to the unfavorable stock market, which wiped out assets seniors had earmarked for long-term care. With assets down, seniors have had to turn to other solutions to fund that care.
Also helping Krause's business, however, is the Deficit Reduction Act of 2005, which took effect in February 2006. This law severely limited seniors' long-standing practice of giving away assets at less-than-fair market value to relatives or others in order to meet the Medicaid eligibility thresholds. Under the new law, Medicaid can look back even farther in the client's history, going back five years instead of only three, to find out if assets were gifted at less than market value. If they were, it can delay a person's eligibility for Medicaid.
But Krause says that while the 2005 act became more stringent about Medicaid rules in one regard, it also helped pave the way for immediate annuities as a tool to shelter countable assets for those trying to qualify for the program. If Medicaid annuities were unacceptable as a way to qualify for Medicaid, as states often had claimed, the Deficit Reduction Act would have prohibited them. But it didn't.
Under the newer laws, to be Medicaid compliant, an annuity must name the state as primary remainder beneficiary. The state may be a secondary beneficiary if there's a spouse, minor child or disabled child. Medicaid applicants also must disclose any interest in an annuity. The annuity must be irrevocable and non-assignable. And it must be actuarially sound, based on Social Security tables, and pay out in equal installments during its term with no deferrals or balloon payments. Generally, this won't include tax-deferred annuities.
"If the purchase of an annuity fails to meet those criteria, the purchase will be treated as disposal of an asset for less-than-fair market value," warns Greg Womack, an Edmond, Okla., financial planner.
An immediate annuity, Womack says, may prove an especially attractive way to shield a couple's assets. Once one spouse enters a nursing home or assisted-living facility and applies for Medicaid, the rules place certain limits on the amount of assets the non-institutionalized spouse may keep. So it might be a more attractive option to convert all the couple's assets into income through the immediate annuity.
"We've done just a couple [of Medicaid compliant annuities] over the last few years," Womack says. "Most were pre-planning. We work with an elder law attorney because every state is different."