Private Annuities can Help Protect Your Assets

This is Strategy #14 from Lamson & Cutner’s publication, “25 Strategies to Prevent Financial Ruin from Long-Term Health Care Costs.”  Click here to see the other strategies.

Annuities have an advantage. An effective method to protect cash and assets for someone who needs nursing home care, and who has transferred assets within the "look back" period is to use a private annuity strategy. It usually preserves approximately 40% to 50% of your resources, if any transfers have been or are going to be made during the "look back" period. This strategy is based on a Federal statute, so it’s one we use frequently, with great confidence that it will provide a beneficial result for our clients.

As an illustration, let's say you'll be entering a New York City nursing home. You have $260,000 you want to protect from being lost to Medicaid requirements to pay for your own care. It's a two-step plan.

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First, about half of the amount is given as a gift to a child, sibling or other trusted person. That means there will be a "penalty period" in the neighborhood of 5 months. That's because $130,000 divided by $12,844, which is the Medicaid regional monthly rate for a NYC nursing home in 2020, equals about 10 months. (Medicaid's regional rate usually changes each year, so that a "penalty period" calculation in 2021 or later will yield a slightly different result.)

In the second phase of the strategy, a private annuity is created for the remaining amount of roughly $130,000. An annuity is a contract that makes specific payments at set intervals. If it’s properly structured to comply with the law, the purchase of the private annuity does not incur a Medicaid penalty. Here the annuity is structured to create a stream of income, and will pay 13,000 per month for 10 months to you. You will then use this money, together with your other income (Social Security, pension, etc.), to pay the nursing home. That covers the cost of care during the "penalty period" imposed by Medicaid.

The end result: instead of using almost the entire $260,000 to pay for nursing home care, which Medicaid would otherwise require before paying any benefits, somewhere around $130,000 has been preserved. You've transferred the money to a trusted source, who will use it on your behalf while you're in the nursing home. Whatever is left after you die can go to your loved ones, providing a financial benefit to your family that they would not otherwise have received.

Now here's an important point. Some Elder Law firms will use a promissory note, instead of an annuity, for this strategy. In the above example, $130,000 would be transferred to another party in exchange for a promissory note, specifying payment terms of $13,000 a month for ten months. Our use of annuities doesn’t imply that promissory notes don’t work. The law currently allows either to be used. However, we believe a properly prepared annuity is a safer vehicle in the long run.

"Immediate annuities," which are the kind used for this planning method, have a long, well-established history of being a contract for a stream of income, with no ability to demand return of principal. That's a critical element for the annuity to be considered Medicaid compliant, and for the entire strategy to be acceptable within Medicaid guidelines. Promissory notes, however, have traditionally been regarded as assets. Assets are, at least in theory, subject to liquidation into cash that could then be contributed to the cost of your care. Consequently, we have some concern that the use of promissory notes could at some point expose our clients to an unnecessary risk, though perhaps very small, of a Medicaid denial.

In general, safest is best with Elder Law planning. A small advantage can make a difference in a successful outcome for a client, and may later prove to be more significant than first anticipated.

In representing an 85-year-old widow who had numerous investments, assets, and property in Florida, we arranged for the transfer of everything she owned to her daughter.  Approximately 50% of that was considered a gift, which triggered the Medicaid "penalty period," and the other 50% was set aside to be used for a private annuity.  We then prepared the private annuity that paid the widow during the penalty period. The net result was that we were able to save about half of her financial resources.  Her daughter can now use that money for attending to her mother's needs, and making her stay at the nursing home as pleasant as possible.

After her mother passes on, the daughter will keep whatever is left, which she would never be in a position to receive had these planning steps not been taken.

25 Strategies to Prevent Financial Ruin from Long-Term Health Care Costs

  1. You can qualify for Medicaid (even if you don’t think so)
  2. The “Wait and See” Approach can Result in Ruinous Health Care Expenses.
  3. Plan for Home Care and Nursing Home Facility Care while You Still Can.
  4. What’s the difference between Medicare and Medicaid?
  5. It’s NOT too Late for Effective Medicaid Planning (even if you think it is)
  6. Why Hire an Elder Law Attorney?
  7. Don’t Prepare Your Own Medicaid Application
  8. Trusts Can Protect Your Home and Your Money!
  9. Special Trusts for Specific Purposes
  10. Protecting Co-op Apartments Require Special Handling
  11. Evaluate Your 401k or IRA Carefully when Planning for Medicaid
  12. Why Take the Lump Sum Option on Your Pension or Retirement Account?
  13. Choose Your Trustee Wisely
  14. Private Annuities can Help Protect Your Assets
  15. Caregiver Agreements Help Achieve Medicaid Eligibility
  16. Keep Your Medicare Insurance
  17. The Durable Power of Attorney
  18. Elder Law and Estate Planning
  19. The Health Care Proxy vs. the Living Will
  20. How to Choose an Elder Law Firm
  21. Streamline Your Financial Affairs and Record Keeping
  22. New York State is More Generous than Other States
  23. Your Attorney can Help Find the Best Care for You
  24. Long-Term Care Insurance Won’t Necessarily Solve the Problem
  25. Compassionate Elder Law Planning Focuses on Your Future Quality-of-Life!

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