 |  |  |  |  |
 |
 |
 |
 |
 |
|
|
|
|
|
|
B
F
A
R
One of the hot new products being touted in seminars these days is the so-called "Medicaid Annuity" or
"Medicaid Friendly Annuity". Some insurance representatives are pushing these products using scare tactics
aimed at elderly individuals or couples who become concerned about the cost of long term care.
What is a Medicaid Annuity? Most conventional annuities, both fixed and variable, offered by financial and
insurance representatives, have a tax shelter or tax deferral motivation and fit into financial plans for this
reason. The typical annuity is a COUNTABLE ASSET for determining Medicaid eligibility in the same manner
as stocks, bonds or certificates of deposit. The rationale is that these annuities can be liquidated and,
therefore, should be considered available assets. On the other hand, an irrevocable annuity may be
considered a NON-COUNTABLE ASSET depending on the circumstances, especially relating to the term of
the annuity and the life expectancy of the annuitant.
A "Medicaid Friendly Annuity" is an annuity that can be converted to an irrevocable annuity. It is a product that
often carries large surrender charges and in many cases may not be appropriate for the client.
What are the dangers? Unfortunately, the objectives of many insurance representatives are simply to sell an
annuity product, regardless of the individual circumstances of the client, or the immediate need for long term
care. There are many reasons why an irrevocable annuity - Medicaid Annuity - is not appropriate. As
professional advisers, you should caution your clients about jumping into these products or plunging ahead
on the representation of an insurance representative, with a purchase which may prove to be very costly in
more ways than one.
Problems that we have encountered in our Medicaid practice are as follows:
1. Income Tax Horrors. We have seen efforts by representative to induce older clients to cash in their savings
bonds to purchase a Medicaid Annuity, thereby incurring ordinary income tax on substantial portion of the
proceeds.
2. Timing. Medicaid Annuities should not be purchased as a substitute for long term care insurance, or on the
mere possibility that long term care will be required. Rules are too complex and the consequences of an
irrevocable annuity are to drastic to make this a viable strategy.
3. Married Couples. For married couples, Medicaid planning for one spouses requiring long term care is
more complicated. If a Medicaid annuity is purchased at the wrong time, it could severely impact the amount
of assets that the at-home spouse can retain.
4. Term. In some cases, the irrevocable annuity is sold for the wrong period of time and is thus considered
COUNTABLE, regardless of the fact that it is irrevocable.
5. Older Annuitants. Certain irrevocable annuities offered by many insurance companies are not really
appropriate for older annuitants. Many insurance companies are not equipped to offer flexible payment
programs.
6. Strength of the Insurer. An annuity is only as good as the strength of the insurance company providing the
coverage. There are insurers touting their Medicaid Annuity products who have inferior Best ratings. It is
completely unnecessary for any of your clients to purchase coverage from a company with a weak rating.
7. Other Living Options. The purchase of a Medicaid Annuity could very well restrict possibilities for living in
more desirable circumstances, such as assisted living.
8. Changes in Rules. The Medicaid Eligibility Rules vary from state to state, and are in a continuous state of
flux. Medicaid Annuities are not appropriate for any type of long term planning and should be used only where
there is immediate need. Michigan’s rules can change at any time, a factor which many unscrupulous
insurance representatives neglect to mention.
9. Surrender Charges. Scare tactics to sell gimmick products often result in high surrender charges when the
problem has to be corrected.
Summary. Medicaid Annuities should only be purchased where there is an immediate need for long term
care, and the prognosis is for an indefinite stay in a nursing home. Medicaid planning is a complicated
subject. The bottom line is that many insurance representatives are interested in earning commissions and
are not Medicaid planners. THERE IS NO SOLUTION THAT FITS EVERY CASE. Ages, composition of financial
assets, total wealth and family circumstances, are just a few of the factors that enter into a sound plan for
both the welfare of the family, as well as possible Medicaid eligibility.
Medicaid Annuities are no substitute for long term care insurance. Where health and age factors permit, we
urge clients to obtain long term care insurance as the best and most reasonable financial protection for their
family resources.
The bottom line is that you, as professional advisers, should be aware of the growing hype concerning
Medicaid Annuities, and caution your clients to obtain the advice of a qualified elder law attorney, experienced
in Medicaid planning and applications, before committing their financial resources to a product which not only
may be inappropriate, but may also cause potential damage.
In recent years, my practice has been directed more and more to Medicaid planning, and I would be happy to
consult with you on any particular situations that involve your clients.
We credit the Elder Law Advocate for its timely article on this subject. It is a publication of the Elder Law and
Advocacy Section of the Michigan Bar of which I am a member.
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional
advice.
| WEALTH CONSERVATION: PROFESSIONAL ALERT Brandt, Fisher, Alward & Roy, P.C. |
| September 2002 MEDICAID ANNUITIES - IMPORTANT ALERT by James R. Modrall III, J.D., C.P.A. |
| If you would like to receive future editions of the monthly Wealth Conservation Newsletter directly to your e-mail account, please e-mail our office using the following link: Estate Planning Newsletter |
| Brandt, Fisher, Alward & Roy, P.C. Attorneys at Law |