In a brief past career I was an annuity marketing specialist at an independent brokerage firm. I consistently reviewed and explained over 800 different brands of annuities to financial planners. Most annuities may offer income for life or a set period of time, some have guaranteed living benefits or guaranteed death benefits, some have up-front bonuses or stock market indexing. I bring this up to show that I am well aware of many of the features and benefits of annuities.
However, for Medicaid planning there is nothing more potentially ruinous than owning an annuity outside of a retirement plan. Remember that Medicaid planning is an “asset game”: While we can do little to influence our beneficiary’s income, we can designate how to transfer assets. Once an annuity is annuitized you erase the transferable asset entirely and instead receive a guaranteed income stream for life. This means that you instantly add to the amount you must spend down in order to qualify for Medicaid’s maximum income requirements of $829 per month for home care.
If you want to instead surrender the policy you may have a surrender penalty or, more relevantly, all of your initial withdrawals will come from any gains on your policy and are entirely taxable income. Example: If you bought an annuity for $100,000 and now it is worth $150,000 the first $50,000 of withdrawals will be entirely taxable income. This could effectively wipe out the tax deferral you made on all gains, since the increased income tax liability may boost you into the next highest income tax bracket.
If the annuity is in a retirement plan, all funds withdrawn are not only taxable income but also available income for Medicaid eligibility purposes. The principle of the annuity is excluded for Medicaid resource eligibility, as long as systematic payments are being made. Still, I recommend speaking with an elder law attorney prior to purchasing a commercial annuity in these circumstances, due to the internal fees associated with annuities.
In short, annuities may be appropriate instruments for retirement income purposes, but are often a giant killer when it comes to planning for Medicaid eligibility. If you think Medicaid planning is an absolute necessity consider withdrawing gains over a two year taxable period, such as half your gains in December, the other half in January. And no matter what: If you already own an annuity outside of a retirement plan do NOT take any action without consulting an elder law attorney: The taxes, penalties, surrender charges, and potential loss of transferrable assets will not be something you or your family forgets for a long time.
Q FOR U: When was the last time you reviewed your annuity contract? Do you know the gains, guarantees and benefits of the policy?