Immediate Annuities and Long-Term Care Planning

The Benefits of Immediate Annuities

An immediate fixed annuity may be the answer for those seeking a steady stream of income in retirement. When you purchase an immediate fixed annuity, you give a lump sum to an insurance company. The insurance company then pays you a set amount each month for the rest of your life. There are several different types of annuities, but the immediate fixed annuity has two key elements. The annuity is immediate — meaning the insurance company starts making payments right away. This is in contrast to a deferred annuity, which begins making payments at a later date. In addition, the annuity is fixed. Unlike a variable annuity, which can fluctuate with the stock market, the amount you get with a fixed annuity stays the same each month.

The benefit of an immediate fixed annuity is a steady stream of income for life. This can be helpful if payments from Social Security and your pension or 401(k) don’t cover your needs. Immediate annuities can also be used to make up missed income if you retire early. However, there are downsides. First. you must have accumulated some savings to use for the initial premium payment used to purchase the annuity. Another issue is that payments are not adjusted for inflation, so over time the money you receive is not worth as much. In addition, the money in the annuity cannot be withdrawn, so if you need a large sum of money for a medical or other emergency, it will not be available. Because of the lack of liquidity, experts advise putting not more than 20 to 30 percent of your assets into a fixed annuity.

Using Annuities for Long-Term Care Planning

Immediate annuities are also useful for Medicaid planning. Purchasing an immediate annuity is a way for people with assets in excess of Medicaid’s limits to turn the assets into an income stream while avoiding a penalty for transferring the assets. The Deficit Reduction Act of 2005 (DRA) changed the requirements for annuities. Under the DRA, an annuity must meet the following requirements in order to avoid a transfer, or gift, penalty:

* The annuity must be irrevocable (meaning that it cannot be canceled)
* The annuity must be actuarially sound (which means the annuity cannot cover a term longer than the purchaser’s life expectancy and the payments expected during the annuitant’s life expectancy must at least equal the cost of the annuity)
* The payments must begin immediately (you cannot have deferred payments or a balloon payment)
* Unless there is a spouse or a minor or disabled child, the state must be named as the remainder beneficiary (the person or entity that gets any leftover money) up to the amount of Medicaid provided

Perhaps the best use of an annuity for Medicaid planning is for married couples, one of whom needs Medicaid-covered long-term care. An immediate annuity allows the couple to turn their excess assets into income for the Medicaid recipient’s spouse. If a spouse purchases an annuity that meets the requirements under the DRA, he or she will receive the income from that annuity without having to contribute it to the Medicaid recipient’s long-term care. But, as a result of a 2006 amendment to the DRA, the spouse will have to name the state as the remainder beneficiary for costs incurred by the Medicaid recipient as well as herself if she ever receives Medicaid. However, such repayment would only occur if she were to die before the guaranteed payments under the annuity had expired.

Annuities generally have been less useful as Medicaid planning devices for single individuals. For example, if a single individual purchases an annuity, the interest income from the annuity counts as income and will have to be paid to the nursing home. Then, once the purchaser dies, any remaining money in the annuity will first go to the state to pay any unpaid nursing home bills. If there is any left over, it will go to beneficiaries named by the purchaser.

However, in some states immediate annuities may have a place for single individuals who are considering transferring assets. Income from an annuity can be used to help pay for long-term care during the Medicaid penalty period that results from the transfer. In such cases, the annuity is usually short-term, just long enough to cover the penalty period.

While immediate annuities can still be a powerful tool in the right circumstances, they must be distinguished from deferred annuities, which have no Medicaid planning purpose. Importantly, acceptance of immediate annuities for Medicaid planning varies from state to state. The status of annuities as Medicaid planning tools in New Jersey is in transition, but more recent caselaw shows that the environment is becoming more favorable for immediate annuities. I previously blogged about the use of immediate annuities as a Medicaid planning tool in New Jersey here, here, here and here. Be sure to consult with a certified elder law attorney before pursuing this strategy.