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By John M. Bigler The subject this month is annuities. I'm not discussing whether they're particularly good investments because I have no qualifications in financial planning. My concern is that they're used in regard to protection of assets in the case of long term catastrophic illness. Having said that, I'm concerned when I see people of advanced age purchasing long-term annuities. I wonder if the investment is really to their benefit or whether it's more for the benefit of the person selling the annuity.
As an example, Harry suddenly suffers a massive stroke. He has $100,000 in his name and he is about to enter a nursing home. The typical scenario that I've explained a number of times in these articles would be to employ the rule of halves. We would transfer about $50,000 out of Harry's name to a trusted relative, which would incur a period of ineligibility for Medicaid at the present time of about 6 1/3 months. During that time, we would use the $50,000 left in Harry's name to pay the nursing home. At the end of that period, the period of ineligibility would be over for the transfer and Harry would be eligible having saved roughly half of his assets. Proponents of the annuity would simply have Harry purchase an annuity for $100,000. The annuity would provide Harry with a stream of income but wouldn't be considered a transfer. Theoretically, Harry would immediately be eligible for Medicaid because he didn't transfer assets. Of course, any monthly income Harry receives would have to go to the nursing home to reduce Medicaid's cost. So, the monthly payment from the annuity would be lost. If Harry were expected to live for a long time, this plan wouldn't work out because the annuity would pay out during Harry's lifetime and all would be lost. But, if the family is banking on Harry not having an extended lifetime, then a certain amount of income would be lost, but the balance of the annuity value will be saved as it passes to the beneficiaries on Harry's death. In order to pass Medicaid's muster, these annuities must meet certain requirements. The annuity must be irrevocable and must provide realistic monthly payments based on Harry's projected lifetime. One objection to this plan is the morbidity of trying to estimate Harry's lifetime. However, when it comes to saving money, most families can overlook this problem. Recently, a much greater problem has arisen. The concern is the challenge by various states to the conversion of countable assets to annuitize income. In 1998 a letter was issued from a representative of the Health Care Financing Administration (HCFA), which is the federal agency involved with the Medicaid program. That letter raised the issue of whether the purchase of annuities with resources would be an allowable way to avoid a Medicaid period of ineligibility. As a result of that letter, the Department of Social Services of three different states, Ohio, New Jersey and Pennsylvania, have all challenged annuities in the court and have been successful. In Ohio, Medicaid was successful in a state appellate court in arguing that an annuity in the name of the spouse of an institutionalized person should count as a resource against the spouse. In New Jersey, annuities had been permitted for the last five years. However, in 1999 the state changed its policy regarding annuities. An action was brought in federal court challenging the change in policy and the federal court upheld the state. In Pennsylvania, the Department of Social Services decided that no annuities would be accepted and, once again, that decision was upheld, this time in the state court. All of the decisions relied in part on the HCFA letter. These cases are the first of their kind and many more are sure to follow. There are a number of very persuasive arguments why the annuities should, in fact, be accepted as a legitimate means of converting resources into income without suffering a period of ineligibility. However, at this stage, I'm not comfortable advising my clients to purchase annuities. I find that most clients aren't anxious to become famous because their name was on a court case that dragged on for many years with no certain results and with expensive litigation costs. In my opinion, until this matter is clearly settled in favor of annuities, it makes much more sense to transfer assets outright, accepting a period of ineligibility and leaving enough in an individual's name to pay for medical costs during that period. Transfers of assets also have another advantage over annuities. With a transfer there's a known period of ineligibility that will at some point expire. With an annuity, the senior may end up disappointing his/her family by failing to expire and living out the term of the annuity and thereby using up the income. For the time being, planned transfers outright to trusted family members or into an irrevocable trust are still the best planning tool for long term catastrophic illness. Reprinted with permission of the Suffolk Times © 2000 [ Contact Us ] [ Guestbook ] [ Email ]  The Law Offices of John M. Bigler, Attorney At Law 1421 Wantagh Avenue, Wantagh, New York 11793-2206 1-888-ELDER-LAW · 516-409-6565 · Fax: 516-409-6522 E-Mail: info@biglerlaw.com · Web Site: www.biglerlaw.com |
In any event, in the last few years annuities have become a popular planning tool for some elder law attorneys. The idea is, rather than transferring assets and incurring a period of ineligibility for Medicaid in a nursing home, to purchase an annuity. The argument is that the purchase of an annuity, which changes principal into a stream of income, isn't a transfer at all, but simply a change of identity.