Annuities and Qualifying for Public Benefits

Do you own an annuity? Annuities are a complicated subject and even more so when it comes to their effect on the Medicaid or VA Aid and Attendance application process. How can an annuity impact a person’s ability to qualify for Medicaid or VA benefits in the future?

Before I answer the question, let’s start with some basics.

Annuities are creditor protected insurance products that guarantee income. A qualified annuity is a financial product that accepts and grows funds. Premiums for qualified annuities are generally paid with pretax dollars, as are any investments purchased for use in a qualified retirement plan. “Qualified” is a descriptor given by the Internal Revenue Service to indicate that the annuity may be eligible for a tax deduction. Any annuity not used to fund a tax-advantaged retirement plan or IRA is considered a nonqualified annuity.

Many people buy annuities. They’re a common retirement planning tool. The problem happens when people purchase annuities without taking the time (or even knowing) to consider how the annuity might impact public benefits qualification. And why would anyone think about it? That’s usually the last thing on a person’s mind during the retirement planning process.

In the Medicaid world, if you purchased or annuitized a non-qualified annuity on or after 11/1/2007, in order to do planning, I must know when you bought the annuity and when it was annuitized. If you bought the annuity after 11/1/2007, there are restrictions on whom you can name as beneficiary for Medicaid purposes. Your spouse can be the first beneficiary and the second beneficiary can be a disabled child, if you have one. When it comes to the third beneficiary, that’s when things get dicey. You must name Medicaid as the third beneficiary irrevocably to the extent that they paid Medicaid benefits.

I’ve worked on cases where there’s no death benefit on the annuity. If the owner of the annuity dies, the annuity stops paying. But there is usually money remaining on the back end of the annuity. Who gets that money? You guessed it: Medicaid.

Purchasing an immediate annuity can also be a useful tool in the Medicaid asset protection toolbox, but it’s one that must be deployed very carefully. In Florida, the purchase of an annuity is not considered to be a transfer for purposes of eligibility for Medicaid ONLY if the annuity meets certain criteria.  (The list is long, but if you’re interested in the details, refer to the Florida Medicaid Manual 1640.0609.03. Transfers to Annuities on or After 11-1-2007. If an annuity meets these criteria, it transforms otherwise countable assets into a non-countable income stream.  It is important to remember that Medicaid must be named as a beneficiary if the Medicaid applicant is single. If the Medicaid applicant is married, the applicant can name their spouse or disabled child first, but then must name Medicaid irrevocably as the beneficiary.

In the VA world, we were once permitted to take a retirement account and purchase an annuity in order to qualify the elder for VA. The goal was to convert the lump sum value of that retirement account into a cash income stream. However, as of 10/18/18, the government no longer allows us to do that.

What’s the best way to make annuities work for you? Early planning is key. And the best person to advise you during your planning process is an experienced elder law attorney who understands the ins and outs of Medicaid and VA planning. That’s what we do here at the Flammia Elder Law Firm. It would be an honor to assist you.

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