5 Things You Need to Know About Medicaid Annuities

DE PERE, Wis. - March 25, 2015 - PRLog -- The Deficit Reduction Act of 2005 ("DRA") has been around for nearly nine years. The planning techniques that were created as a result of the legislation have been in full swing for nearly the same time-frame.  The use of Medicaid annuities in planning is not new.  We all know the DRA requirements pertaining to annuities.  However, my office still hears an "I didn't know you could do that!" on occasion.  I've compiled the top five, and have outlined them here for you.

1. Medicaid annuities can sometimes make balloon-style payments; they don't HAVE to always provide a level payout.
Depending on who is purchasing the annuity, and what type of investment the annuity is being purchased with, a balloon-style Medicaid annuity may in fact be a viable planning option.  In a handful of states the annuity rules differ for an institutionalized spouse and a community spouse.  The rules can also differ for tax-qualified funds and non-qualified funds.

For example, in Wisconsin an annuity purchased by a community spouse is NOT required to be actuarially sound or provide equal payments.  Furthermore, for most states, an annuity purchased with tax-qualified funds is not required to be actuarially sound or provide equal payments.  The lacking equal-payment requirement opens the door to the use of a balloon-style annuity, maximizing the shift of income from the institutionalized spouse, lessening the monthly Medicaid co-pay.

2.  Medicaid annuities can be funded with tax-qualified funds (e.g. an IRA) or non-qualified funds (e.g. checking/savings).
About 1 in 5 elder law attorneys have no idea that an IRA can easily be converted into a Medicaid Compliant Annuity without incurring immediate tax consequences, and previously instructed their clients to liquidate their accounts.  Generally, an IRA owner has two options to fund a Medicaid Compliant Annuity: (1) a direct transfer or a (2) 60-day rollover.

The direct transfer consists of a direct plan-administrator to plan-administrator transfer.  The insurance company issuing the annuity would obtain the funds directly from the company holding the IRA.  The IRS does not limit the number of times an individual can “transfer” his or her IRA.

The 60-day rollover takes place when the owner requests a liquidation of his or her IRA without withholding taxes and takes control of the actual funds.  Within 60 days of receipt the owner needs to fund the new annuity contract.  The IRS limits the number of times an individual can “rollover” his or her IRA to once each fiscal year.

NOTE:  A recent tax court case, Bobrow v. Commissioner (https://www.medicaidannuity.com/bobrow-v-commissioner-new...), brought a major change to the limitation of IRA rollovers each year.

3.  Not every DRA state uses the life expectancy tables published by the Social Security Administration.
Yes, the DRA outlines the use of the life expectancy tables published by the Chief Actuary of the Social Security Administration.  However, many states still use their own versions of the tables, usually based off of outdated Social Security tables.  To ensure you’re using the correct table for your state, visit this page and select your state from the map (https://www.medicaidannuity.com/resources/state-resource/).  If your state has a specific table, it’ll be listed at the top of the page.

4.  Every state requires annuity payments to be equal.  Every state does NOT require them to be monthly.
This leaves the door open to quarterly payments, annual payments, and more.  You might wonder what the point would be in an annual payment.  Well, it could be quite advantageous when planning with IRA funds (https://www.medicaidannuity.com/countable-ira-accounts-and-medicaid-3/).

5.  When a community spouse purchases an annuity the state Medicaid agency doesn't always have to be the primary beneficiary.
Some states allow for a community spouse to designate his/her institutionalized counterpart as the primary beneficiary and the state Medicaid agency as the contingent.  Why would you want to do this, you ask?  At the time of the community spouse’s death, if the insurance company allows the institutionalized individual to receive the residual balance in one lump sum payment, he/she can then proceed with a half-a-loaf plan and make a wealth transfer while re-establishing Medicaid eligibility.