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What Is It?

What Is an Immediate Annuity?

An immediate annuity is a contract with an insurance company that gives the owner the right to receive periodic payments for a specified period of time (or for life) in return for one or more premium payments. Essentially, the periodic payments are based on the owner's life expectancy and the insurance company's rate of return. If payments are made for a term certain only, such as for 10 years, then the annuity is called an "annuity certain." If payments are made for the duration of a designated life, on the other hand, then the agreement is called a "life annuity" or, more commonly, a "single life annuity." An immediate annuity is useful in Medicaid planning if properly structured to conform to requirements of the Deficit Reduction Act (DRA)--(see more about these requirements below). With this vehicle, you pay a lump sum of cash to an insurance company, and the insurance company promises to pay you a series of periodic payments starting at a specific date within 12 months of the premium payment.

Example(s): Helen is a widow who has recently inherited a substantial life insurance sum from her deceased husband, Ray. Helen is 66 and had always relied on Ray to manage the finances, so she is unsure of how to invest the money and still meet her monthly bills. She decides to purchase a single life immediate annuity. Helen transfers the lump sum of cash to an insurance company and will start receiving monthly annuity payments; these payments will continue for the rest of her life.

Caution: Guarantees are subject to the claims-paying ability of the annuity issuer.

How Can an Immediate Annuity Help You to Qualify for Medicaid?

To qualify for Medicaid, both your income and the value of your other assets must fall below certain limits, which vary from state to state. To determine your Medicaid eligibility, a state will add up your income and resources, but it may count only the income and resources that are legally available to you.

An immediate annuity that is irrevocable and nonassignable may help you qualify for Medicaid by converting a countable resource that you otherwise would have to spend down into an income stream. If the immediate annuity complies with the requirements of the DRA, then only the monthly annuity payments you receive will be counted as income.

Caution: States differ in their treatment of annuities used for Medicaid planning. For more information, consult a knowledgeable elder law attorney or financial professional experienced with Medicaid planning in your state.

How Can an Immediate Annuity Help Your At-Home Spouse?

As discussed, eligibility for Medicaid is based on the amount of your income and other resources. In regard to a married couple, each spouse is entitled to his or her own periodic income; the healthy spouse (called the community spouse) is under no obligation to contribute income to the institutionalized spouse's care.

A different rule applies to assets, however. Medicaid pools together a married couple's assets when determining the eligibility of one spouse for Medicaid, but permits unlimited transfers of assets between the husband and wife without penalty. While almost all of the income of the institutionalized spouse must be paid to the nursing home, the community spouse has no such income limit and his or her income is not counted when determining Medicaid eligibility. A community spouse can take jointly owned, countable assets and purchase a Medicaid-compliant single premium immediate annuity for his or her own benefit. In effect, the community spouse is converting countable assets into an income stream. As a result, the institutionalized spouse can qualify for Medicaid more easily and the healthy spouse can benefit from the income stream.

Example(s): George and Gracie jointly own $100,000 in countable assets. George requires nursing home care immediately. Upon admission, the nursing home reviews the couple's assets for the purpose of qualifying George for Medicaid. Applicable state law provides that Gracie may keep one-half of the assets ($50,000) and the balance will go to pay the nursing home. However, after the assessment is made, Gracie can transfer George's share ($50,000) to an immediate annuity with payments made directly to her in her name.

Although an immediate annuity is especially useful for helping the at-home spouse of an institutionalized Medicaid applicant, it can also be a valuable planning tool for a single person. That's because income is counted differently than assets for Medicaid purposes. For instance, a single person who has $21,000 of countable assets will not qualify for Medicaid, while a single person who has no assets but receives $450 per month in income would qualify in most states. Therefore, if you use the $21,000 to purchase an immediate annuity with payments of $450 per month for a term of years equal to or less than your life expectancy, you will qualify for Medicaid, assuming that you meet all of the other requirements.

What Requirements Must an Immediate Annuity Meet?

In the context of Medicaid planning, it is essential that your immediate annuity meet a number of requirements in order to be considered Medicaid compliant. Prior to the enactment of the Deficit Reduction Act of 2005 (the DRA), the requirements were that the annuity be immediate, irrevocable, nonassignable, guaranteed for a period certain or tied to life expectancy, and that it name only the Medicaid applicant or spouse as recipient.

Caution: Guarantees are subject to the claims-paying ability of the annuity issuer.

For transactions (including the purchase of an annuity) occurring on or after February 8, 2006, the DRA requires that the annuity be irrevocable, nonassignable, actuarially sound based on Social Security Tables, and pays out in equal installments during the term of the annuity with no deferral or balloon payments made. Further, the state must be named as the remainder beneficiary for at least the value of the Medicaid assistance provided (but may be a secondary beneficiary after a spouse or a minor or disabled child).

Caution: If the purchase of an annuity does not meet the requirements above, the purchase will be treated as a disposal of an asset for less than fair market value, and you will be ineligible for Medicaid for a certain number of months.

Additionally under the DRA, at the time you apply for Medicaid or at recertification, you must disclose any interest you have or your spouse has in any annuity. And, be aware that the annuity issuer may be required to notify your state when there is a change in the amount of income or principal withdrawn from the annuity.

Tip: Annuities purchased within a retirement plan are treated differently. Ask your financial professional or attorney experienced with Medicaid planning for more information.

When Can It Be Used?

You Want To Preserve Otherwise Countable Assets and You Anticipate the Need for Long-Term Care

The immediate annuity is a useful planning tool to help you qualify for Medicaid, and to provide a stream of income for the community spouse. It's used when you expect to need long-term nursing home care and wish to preserve assets. Otherwise, these assets might be depleted through nursing home bills.


Increases Income for At-Home Spouse

Instead of receiving only a portion of the family assets, such as one half, the at-home spouse can convert some, or all, of the countable assets into an income stream for his or her benefit. This is because the Medicaid rules:

  • Allow unlimited transfers of assets between spouses.
  • Provide that each spouse is entitled to keep his or her own income.
  • Allow an exchange of assets to third parties for fair value. As a result, the at-home spouse can preserve resources and enjoy an income stream.

Helps Medicaid Applicant Qualify For Medicaid

Assets that are truly inaccessible to the Medicaid applicant are not considered under Medicaid rules; therefore, the lump sum of cash that you transfer to the insurance company will lie outside of your financial picture for Medicaid eligibility purposes. Only the monthly annuity payments will be counted as income. Because income is counted differently than assets, a single person who has $21,000 of countable assets will not qualify for Medicaid, but a single person who has no assets and receives $450 per month in income could qualify in most states. Therefore, purchasing an immediate annuity might help you to qualify for Medicaid.

Avoids Medicaid Waiting Period

Often, transferring your assets in order to qualify for Medicaid subjects you to various penalties, including the creation of an ineligibility period before you can collect Medicaid benefits. An immediate annuity, however, is an exception to this rule. In most states it is viewed as a legitimate transaction, since you receive something of fair market value--the periodic payments--in return for the lump sum of cash that you give away.


Control over Assets Is Lost

The annuity contract must be irrevocable in order to be an effective Medicaid planning tool. This means that once you transfer assets to the insurance company, you have no further control over the lump sum of money and are powerless to change both the terms of the contract and the amount of the annuity payments.

The State May Get the Remainder of the Annuity Payments Upon Your Death

Since the state's Medicaid program must be named as the remainder beneficiary of the immediate annuity, if the annuity recipient dies before the end of the annuity term, the remaining payments may be paid to the state.

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It Might Be Ineffective In an Income-Cap State

To qualify for Medicaid, both your income and the value of your other assets must fall below certain limits, which vary from state to state. Most states will not simply deny your Medicaid claim outright; rather, they will allow you to spend down your excess resources on the cost of nursing-home care. After you've spent down to the appropriate level, Medicaid will kick in. Some states, however, restrict Medicaid eligibility to those individuals who have income below a specified amount. If you live in such a state, you will be ineligible to receive Medicaid benefits if your monthly income exceeds the threshold. Therefore, an immediate annuity might be the wrong tool if you live in an income-cap state and expect to receive an amount of monthly income that exceeds your state's threshold.

It Is Not Embraced In All States

Medicaid guidelines for the use of annuities have been published by the federal government, under the auspices of the Centers for Medicare & Medicaid Services. Nevertheless, some states do not permit the use of annuities for Medicaid planning, and consider them to be countable assets or impermissible transfers, even when they comply with DRA requirements. It is essential, therefore, to check your state's Medicaid regulations with the help of a qualified professional before purchasing an immediate annuity.

How to Do It

If you are interested in purchasing an immediate, Medicaid-compliant annuity, there are a number of steps that you should follow.

Research the Insurance Company

Annuities vary in terms of safety and yield. The insurance companies issuing the annuities are rated for safety, and because you want to make a sound investment decision, it's important to check your insurance company's rating. You should also make sure that the form of annuity contract you're purchasing has been approved by your state's department of insurance and meets Medicaid guidelines.

Caution: Guarantees are subject to the claims-paying ability of the annuity issuer.

Gather Your Medicaid Eligibility Information

  • Prepare a list of all your assets (and those of your spouse) that indicates how title is held, the tax basis, and how much you paid for each asset.
  • Prepare a list of your and your spouse's income from all sources.
  • Indicate whether your resources are, for Medicaid purposes, exempt, not exempt, or inaccessible.
  • Prepare a list of all your assets transferred within the last five years through gift, trust, or other means. Indicate date of transfer, transferee, purpose, and consideration (what you received in return).

Consult a Medicaid Planning Professional

In recent years, Medicaid laws have undergone a number of changes. Because certain planning vehicles have been eliminated and most rules have been tightened, it is reasonable to expect that further changes will occur in the years ahead. It is vital, therefore, to consult an attorney or financial professional experienced with Medicaid planning.

He or she will advise you of your options, make recommendations, and ensure that your state allows immediate annuities for Medicaid planning purposes.

Tax Considerations

Income Tax

Each annuity payment you receive represents a return of principal (the money you gave the insurance company) and interest earned. Therefore, part of each annuity payment is taxable and part is nontaxable. The nontaxable, or excludable, portion is computed by multiplying each payment received by an exclusion ratio, which is determined by dividing the investment in the contract (the principal) by the contract's expected return.

Example(s): Silas purchases an immediate annuity with $50,000. The expected return on the contract is $77,000, and Silas receives a monthly annuity payment of $540. Approximately 65 percent of each monthly annuity payment (or $351) will be excluded from taxation ($50,000 divided by $77,000 equals 65 percent, and.65 multiplied by $540 equals $351). In this context, expected return is the total amount that the annuitant should receive, given the payments specified in the contract, multiplied by the life expectancy according to government tables.

Estate Tax

The present value of the remaining annuity payments may be includable in the deceased owner's estate for federal gift and estate tax purposes. But a different rule applies if you die after the guaranteed term certain period has expired. If the annuity terminates at the owner's death, and no one else is thereafter entitled to collect payments, then nothing is includable in his or her estate. For more information, contact an estate planning attorney or tax advisor.

Gift Tax

In regard to immediate annuities employed for Medicaid purposes, federal gift and estate tax usually won't be an issue. It can apply, however, if you give away your annuity payments to any one person in amounts in excess of the annual gift tax exclusion . You may still avoid having to pay federal gift and estate tax to the extent of your available applicable exclusion amount . For more information, contact an estate planning attorney or tax advisor.

Questions & Answers

Can You Purchase An Immediate Annuity For A Period Certain That Is Greater Than Your Life Expectancy?

No. Assume you are an 85-year-old female in excellent health, and your husband has just entered a nursing home. You have $100,000 worth of assets in your joint names. You would like to purchase an immediate annuity with the money, live off the income for the rest of your life, and allow your son to collect the monthly annuity payments when you die. Although the life expectancy table predicts only 6.63 more years of life for you, you'd like to purchase a period certain of 15 years so that your son can derive some benefit. However, since the period certain is greater than your reasonable life expectancy (as set forth in the tables), a part of the annuity purchase is likely to be viewed as a disqualifying transfer of assets. This would jeopardize your husband's eligibility for Medicaid. You should consider purchasing an annuity with a period certain of 6.63 years or less.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


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