Proposed change in the way Medicaid treats annuity income

If you're seeking Medicaid long-term care benefits and want to preserve assets, consult a certified elder law attorney. Medicaid law is extraordinarily complex and always in a state of flux, so relying on an expert is essential. The Medicaid office will not provide tips on how to secure benefits any more than the IRS will point you to the latest tax-saving strategies!

Among the proposed changes to Medicaid law currently on the table is HB 1771, introduced in Congress last spring. The experts seem to think passage is a long shot, but it still merits monitoring. If  passed, it would dramatically modify the way in which Medicaid treats annuity income for married couples. 

Here, from my website, is the current rule regarding annuity income and Medicaid eligibility: "Annuities will be considered an asset, unless they are annuitized and the applicant or applicant’s spouse is taking equal monthly installments in an actuarially sound fashion. Applicants and their spouses must disclose to the State of Florida any interest they have in annuities. If the annuity was purchased on or after November 1, 2007, or if other transactions that change the course of an annuity payment or treatment of income or principal have been made on or after November 1, 2007, the state must be named as the remainder beneficiary either at the time of Medicaid benefits approval, or upon recertification. Also, the state must be named as a remainder beneficiary in the first position for the total amount of Medicaid assistance paid by the state on the applicant’s behalf. If the applicant has a spouse, minor child or disabled child, the state must be named as the remainder beneficiary either in the first position, or the second position after the spouse, minor child or disabled child."

If the proposed law passes, a portion of the well spouse's annuity income would be available to the Medicaid applicant: 

• One half of the income the well spouse receives from an annuity that pays income only to the well spouse, would be considered the Medicaid applicant's available income.

• If the annuity pays income to both the well spouse and applicant, one-half of the well spouse's income would be considered available to the applicant. 

• If the annuity pays income to the well spouse and another person, then one-half of the well spouse’s portion would be considered available to the applicant.

These changes could conceivably push an applicant's income out of eligibility range ($2,199.00/month effective 1/1/15), requiring the use of a Qualified Income Trust for Medicaid planning purposes.

Generally speaking, I am wary about using annuities as Medicaid planning tools. There are serious downsides to doing so, and purchasing an annuity is no guarantee of Medicaid eligibility. However, if you already have one, the proposed change could make a big impact on you if you are married and apply for benefits. 

We'll keep an eye on this important issue for you. Subscribe to this blog, get our newsletter, and/or check our website news for further information about this and related issues. You can also keep us with us on Facebook.

Click here to read about current Medicaid eligibility rules in Florida. 

Read the text of HR 1771 here.

Qualified plan longevity annuity hedges risk of outliving retirement savings

Are you are concerned about running out of money before you run out of years? With longer lifespans, skyrocketing health costs, the demise of fixed pensions and the looming Social Security crisis, everyone except the wealthiest are feeling skittish these days.

A new kind of deferred income annuity, commonly called "longevity insurance," may provide an answer. In the past, these annuities were unusable in IRAs and other qualified plans because the required minimum distributions (RMD's) from a qualified plan had to take into consideration the value of the longevity insurance annuity. Now, the RMD issue has been resolved as a result of new IRS regulations. The new regulations apply to these annuities if purchased after July 1, 2014.

You may now put a portion of your 401K or IRA into a deferred income annuity. The income stream kicks in when you attain a certain age and continues until you pass away. Effectively, you are buying protection against the possibility that you will outlive your money. Briefly, here are the new rules and features of the longevity annuity as it applies to qualified plans:

• Up to 25% of the balance in your qualified plan, or a maximum of $125,000, may be put into the deferred income annuity. The dollar limit is indexed to inflation and will increase in the future in $10,000 increments.

• You must begin receiving the income no later than age 85.

• You are still required to take Required Minimum Distributions from your qualified plan at age 70 1/2, but the amount of the annuity is excluded when calculating RMD's.

• Benefits to heirs: There is a return of premium feature. If the purchaser dies before or after the annuity begins, premiums paid but not yet received may be returned to the account, which means the initial investment can be passed to heirs. If the contract includes a life annuity to the surviving spouse, the premiums may be returned after the second death.

As with all annuities, the qualified plan deferred annuity is not right for everyone. If you and your spouse have ample savings and/or other sources of retirement income, you probably don't need one. But keep in mind that when one spouse dies, the survivor often has significantly less retirement income because of the loss of one Social Security check, and possibly the loss of some or all of the decedent's pension. A longevity insurance annuity may provide a safety net to replace that lost income. 

Also keep in mind that a deferred income annuity must be evaluated within the broader context of your estate plan, so be sure to consult with your estate planning attorney.

Living Trust: Fund it or Flub It

I'll call the couple Joan and Bill. They were in my office for a consultation, asking me to review their living trust (aka revocable trust). It had been prepared by another attorney and executed over five years ago.  As we began chatting, reviewing their documents and discussing finances, Joan and Bill dropped a bombshell on me:  I learned that they had never funded their revocable trust! In fact, this nice couple did not even know what "funding" was! Their living trust was the core of their estate plan, but they said that the lawyer who had drafted it had never told them about funding. They had a revocable trust - wasn't that sufficient?

I told them that without being funded, their trust was just a piece of paper, and worthless from an estate planning perspective.  We were all happy they had sought legal advice so this could be set right.

Funding a trust means switching your assets from your own name into the name of the trust. Assets outside your trust are not controlled by the trust. Thus, if Bill had died before we had a chance to set things right,  any assets Bill owned outside the trust, without a named beneficiary or co-owner, would have had to be probated, with the expense and hassle it can entail - exactly what they wanted to avoid.  

Funding your revocable trust is a vital part of your estate planning; however, not all your assets should be owned by your revocable trust. For example, 401ks, 403bs or IRAs should be left outside the trust, as transferring them to the trust would trigger income taxes. Other assets that may be appropriate to keep outside your trust are tax-deferred annuties, real estate, life insurance and limited partnerships. Your estate planning/elder law attorney can give you detailed advice.

As you acquire new assets, you will also have to make sure they are titled in the name of your revocable trust.

Bill and Joan were lucky: They caught their error before either of them became disabled or passed away. Remember, drafting and signing your revocable trust is just step one: you must also fund your revocable trust. Contact our elder law attorneys for guidance.

Retirement Ain't What It Used to Be

Look into the future and you can see that retirement isn't going to be what it once was. The traditional company pension is virtually extinct. One study found that in 2007, only 17% of workers had company pensions, while 63% had 401ks. Fidelity Investments report that as of March 31, 2010, the average 401k balance was $66,900. Even if you assume you'll collect social security, those numbers don't portend the kind of retirement we've all envisioned. Add in escalating health costs, a battered real estate market and other factors, and it looks like most of us are not going to have sufficient funds to live on.

The crisis has not gone unnoticed in Washington. On June 16th a Special Senate Committee on Aging will convene to discuss various approaches to remedy the situation. One methodology being kicked around these days is changing the 401K structure to incorporate some sort of annuity, thus guaranteeing post-retirement benefits. Of course, an annuity is not necessarily failsafe, either!

 

So what's a retireee - or would-be retiree - to do?  It's never too late to plan, particularly if you are still in your working years. You may have to save more, you may have to work a few years longer, but there are options. Let's see what Washington comes up with in the months ahead. Read more.

Florida Dept of Revenue Holding SOS Meeting 2/12

Annuities and reverse mortgages can be great financial and estate planning tools. Unfortunately, in the wrong hands, they become the tools used to fleece seniors out of their life savings. Every day, hundreds of Floridians fall victim to financial fraud. The Florida Department of Financial Services has created the SOS (Safeguarding our Seniors) task force to educate seniors about fraud and develop better strategies for dealing with scam artists.

There will be an SOS meeting in Palm Beach with Florida Chief Financial Officer Alex Sink on Friday, February 12. Partners include AARP, the Florida Bar- Division of Elder Affairs and the Veterans Administration. Consumers who attend will hear panelists discuss financial fraud in Florida, and strategies to address these needs will be discussed. The event will be from 10 a.m. to 11:30 a.m. at Parish Hall, The Church of Bethesda by the Sea, 141 South County Road, Palm Beach, FL 33480.

Prergistration is required. To register, call the Florida Department of Financial Services at 1-877-MY-FL-CFO (1-877-693-5236) and speak with a consumer specialist.