Qualified Balloon Annuities: How do I Use Them in VA Planning?

March 21, 2012 - PRLog -- The Facts.
Marshall, a Korean War veteran, is 88 years of age and lives in Georgia.  After years of struggling with Parkinson's disease and losing his wife in late 2008 Marshall realizes he can no longer live independently.  His Parkinson's disease has restricted his movements making it impossible for him to adequately bathe, dress, or drive himself.  In order to meet all his activities of daily living ("ADLs") Marshall requires the daily assistance of another person.  After meeting with his doctor Marshall learns that with proper health care, medication, and regular exercise, he could live another seven to ten years.  Not wanting to be a burden to his family Marshall investigates the costs of residing in an assisted living facility.

Monthly Expenses.
After deciding on Sunrise Senior Living Marshall learns that the facility will be charging $3,800 per month for his care.  Included in the cost are his one bedroom unit, all meals, ADL assistance, daily house-keeping, and transportation to doctor's appointments.  Marshall's other monthly expenses include: a Medicare Part B premium of $96.40, recurring prescription drug costs of $154.60, a cable television bill of $50, and a cell phone bill of $60.

Note: Marshall's unreimbursed monthly medical expenses total to $4,051.  The unreimbursed medical expense amount does not include Marshall's cable television or cell phone bills in that these expenses are personal.

Note:  Even though the VA will reduce the unreimbursed monthly medical expense amount by 5% of the base pension amount it does not change the economic result of this case study.

Total Countable Resources.
Presently, Marshall has total countable resources of $200,000, with $30,000 in a checking account and $170,000 in an IRA.

Marshall meets with an elder law attorney and is instructed to take the following actions:

The Protected Countable Resources.
In order to avoid the edge of the VA countable resource eligibility Marshall retains $30,000 of cash assets.  With the $30,000 being deducted from the total countable resources of $200,000 Marshall has a VA spend-down of $170,000.

The Monthly Income Shortfall.
Marshall's monthly income consists of $1,200 from social security and pension.  With this amount being reduced by his total monthly unreimbursed medical expenses of $4,051 Marshall has a monthly income shortfall of $2,851.  This is the maximum amount of monthly income that can be created while maintaining eligibility for the full Maximum Annual Pension Rate ("MAPR") - referred to as Income for VA Purposes ("IVAP").

Additionally, in order to avoid Marshall accumulating excess income into the future and with the understanding that he will be receiving a $1,703 VA benefit, his monthly income shortfall is adjusted to $1,148.

The Tax-Qualified Single Premium Immediate Annuities.
To generate the additional $1,148 of monthly income Marshall purchases two tax-qualified single premium immediate annuities ("SPIAs").  With Marshall having excess cash assets of $170,000, to obtain such a minimal monthly pay-out it will be necessary for him to utilize a tax-qualified balloon-style SPIA and a tax-qualified level-pay SPIA.

With Marshall being 88 years of age his Georgia Medicaid life expectancy is 4.2 years/50.4 months.  As such, utilizing two tax-qualified SPIAs Marshall would receive the following guaranteed monthly payments:
Period Certain
   Investment Amount    Monthly Pay-out    Balloon Payment    Total Pay-out
50 Months    $50,896.59    $1,039.61    N/A    $51,980.50
$119,103.41    $108.39    $118,711.80    $124,022.91
Total:
   $170,000.00    $1,148.00    $118,711.80    $176,003.41







Note: Upon maturity, the balloon payment will be made to the owner - Marshall.  As an alternative Marshall may opt to have the balloon payment transferred to a new policy as a means of maintaining program eligibility.  He can do so with a simple letter of instruction to the insurance company.  Furthermore, at any time during the period certain Marshall can elect to convert the balloon-style SPIA to a level-pay SPIA; this is a one-time, irreversible election.

Note:  With Marshall having an annual required minimum distribution of $13,385.83, his monthly required minimum distribution is $1,115.49.  The combined pay-outs of the aforementioned SPIAs will meet Marshall's required minimum distribution set forth by the Internal Revenue Services.

The Advantages of the VA/Medicaid Plan.
The primary advantage of the aforementioned plan is that Marshall is in a position to meet all his care needs during the next 50 months, assuming he continues to reside in Sunrise Senior Living and his monthly costs do not exceed $4,051.  If that is the case, Marshall has the potential to receive $85,150 in Veterans Benefits during the same 50-month period.

Merging Onto the Medicaid Highway.
Assume that prior to the end of the 50-month period Marshall's condition worsens causing him to permanently enter a Georgia nursing home for custodial care.  With zero uncompensated transfers having been made and both SPIAs being "Medicaid compliant," Marshall would be immediately eligible for Georgia Medicaid benefits.

Note:  For Medicaid eligibility purposes in Georgia, annuities that have a qualified tax status according to the Internal Revenue Code are not counted as assets and not required to comply with DRA.  Check with a representative of Krause Financial Services to determine how annuities with a qualified tax status are treated in your state.

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Krause Financial Services specializes in helping families qualify for Medicaid benefits through the use of Medicaid Compliant Annuities, and Veterans Aid & Attendance benefits through the use of various life and annuity insurance products.