Number One Provider of Medicaid Compliant Annuities

Veteran's Planning and Potential Medicaid Benefits - Part One - Minimal Resources

Assume that Roger Smith, a WWII veteran, is moving into an assisted living facility so that he can get some help with his meals, dressing, and taking his medications.  The assisted living facility that he is about to enter charges $2,750.00 per month, which amount includes all of his meals.  As for the medication and dressing services, Roger expects to pay $250.00 per month.  Roger's total out-of-pocket monthly medical expenses, including the assisted living charges, doctor's visits, eyeglasses, hearing aid batteries, and Medicare supplemental insurance, equal $3,300.00.  With personal expenses added to the mix, including: clothing, gifts, and telephone, Roger's total monthly expenses reach $3,500.00.

Having previously sold his family home, most of the furnishings, and automobile, Roger has $160,000.00 in savings.  With only $1,200.00 of monthly social security and pension income, Roger's life savings will be exhausted at the rate of $2,300.00 per month, lasting only 69.56 months.  At 77 years of age, Roger is concerned that his life savings will not survive him, and he may be forced to leave the assisted living facility.

After consulting with an elder law attorney who specializes in VA benefits, Roger learned that he could qualify for a $1,644.00 monthly VA pension benefit if he reduced his life savings to $30,000.00, purchased a $7,500.00 irrevocable funeral plan, implemented a $3,500.00 comprehensive plan, and invested the balance of his life savings, or $119,000.00, into a Medicaid Compliant Annuity ("MCA"). With the MCA being structured over Roger's Medicaid life expectancy of 9.14 years, he was guaranteed to receive 109 monthly payments of $1,308.00, for a total pay-out of $142,572.00.

As a result of the plan, without jeopardizing his life style or his ability to pay for his assisted living care, Roger was able to stretch his life saving from 69 months to 152 months. Finally, it was Roger's attorney's opinion that if Roger needed to enter a nursing home facility for custodial care, with very little planning, Roger could easily qualify for Medicaid benefits.

Uncertain Times and Medicaid Planning

Without question, these are difficult times for many, especially elder law attorneys and their potential clients.  At a time when stock and mutual fund accounts have been slashed in half and nursing home bills are continuously creeping upward, not having a real grasp as to what is going on, families will replace Medicaid planning with indecisiveness.

What does this mean to an elder law attorney's practice?  Should they accept the fact that their caseloads will be down, as well as their revenue?  In order to conserve resources, should they reduce staff, and slash their marketing budgets?  Or, should they replace strategy with hope, and just ride out the storm?  If you answered "yes" to the last two questions, you are not alone.

Hope is never a strategy, and should not be confused with hard work.  Instead, the better approach is not to hope that things will get better, but to become an active participant in capturing success.

To accomplish the goal, you need to do five things.  First, you need to take action.  Learn what works for you, and what does not, and eliminate the things that waste your time.  Second, you need to stay visible.  This is as simple as responding to telephone calls and e-mails in a timely manner, writing articles and newsletters, and attending educational and other public events.  Third, you need to expand your marketing activities.  By hosting a local education forum for other professionals, such as accountants and bank personnel, you can network your way back to a successful practice.  Fourth, you need to stay positive.  With a positive attitude, fast thinking, and moving forward, you will be in the best possible position to reap any available gains.  Fifth, you need to partner with other professionals who can assist you with your practice.  This is as easy as relying on a financial services specialist who understands how to properly use a Medicaid Compliant Annuity.

IRA Accounts - d(4)(A) Trusts and Medicaid

Recently, I worked on a case involving an individual who wanted to put his $90,000.00 IRA account into a self-settled   d(4)(A) (“the Trust”).  Even though I could get the IRA account transferred into a tax deferred annuity (“TDA”) by way of a tax-free rollover (the individual is the owner/annuitant), and the insurance company was willing to re-title the TDA into the Trust (the trust is the owner, the individual is still the annuitant, and the trust is the primary beneficiary), there was a question as to whether, or not, the transaction involved a taxable event.

 

Of course, the safest way to proceed in such a case is to obtain a favorable private letter ruling.  However, the cost to obtain such a letter is approximately $16,000.00, and there was some concern that a favorable ruling was not available.  Additionally, as a result of the high cost, he would only have net investable proceeds of $74,000.00  

 

In the alternative, I determined that if he put the IRA proceeds through the federal taxation system, after his personal exemption of $3,650.00 and standard deduction of $5,700.00, his federal income tax liability would be based on $80,650.00 of taxable income.   Accordingly, the federal income tax liability would be $16,350.00, leaving him net investable proceeds of $73,650.00.

 

Without any guarantees under the private letter ruling option and for the fact that he needed to qualify for Medicaid benefits as soon as possible, he chose the second alternative.  Additionally, in that he had no immediate income needs, the Trustee chose to invest the $73,650.00 into a TDA with a 5 year term, and a guaranteed interest rate of 5% over the term. Assuming no withdrawals from the TDA, at the end of the term the account balance would increase to $93,998.13.  However, if income was needed, the owner/Trustee could withdraw 10% of the account value once per year, with any unused 10% withdrawals being allowed to accumulate.  Finally, at the death of the individual/annuitant (the product is “annuitant driven”), the primary beneficiary/Trustee is entitled to collect the full account value and settle the Trust  

As a result of the cost effective planning, everyone achieved their goals, and the tax reporting was minimized.

d(4)(A) Trust vs. Third Party Special Needs Trust

Question: How does a d(4)(A) trust differ from third party special needs trusts?

Answer: A d(4)(A) trust is a "self-funded" special needs trust.  The money or property going into the trust belongs to the disabled trust beneficiary.  This is the fundamental difference from a "third-party" special needs trust, which was established with money or property belonging to someone else - likely a parent or grandparent.  Since the d(4)(A) trust was established with funds belonging to the disabled person, the spending of those funds are subject to stricter rules than the rules associated to a third-party special needs trust.  For example, any funds remaining in the d(4)(A)trust after the beneficiary's death must first be used to pay back the state for any Medicaid benefits received by the beneficiary during his or her lifetime - payback requirement.  As for a third-party special needs trust, any remaining funds can directed to anyone.  Also, funds in a d(4)(A) trust must be used for the disabled beneficiary's "sole benefit," whereas there is no such limitation with a third-party special needs trust.  For these reasons, assets belonging to a third party should never be added to a d(4)(A) trust. Finally, if a relative or friend wants to make a gift to an individual with disabilities, a third-party trust should be used to take advantage of the increased flexibility and avoid the payback requirement.

Excess Income During a Gifting/Short-Term Medicaid Compliant Annuity Plan

Question: What needs to happen to the monthly income generated by a Gifting/Short-Term Medicaid Compliant Annuity Plan when the individual unexpectedly goes to the hospital and re-enters the Medicare system for skilled nursing home care?  Assume that the individual has a Medicare supplemental insurance plan.

Answer: By the end of the month, a Medicaid applicant/recipient must find a way to spend-down the monthly income.  If the income is not properly spent-down, it converts to a resource by the 1st of the following month.  Then, if the Medicaid applicant/recipient accumulates more than
$2,000.00 in countable resources, he or she is no longer eligible to receive Medicaid benefits.

To accomplish the income spend-down goal, I usually recommend that the Medicaid applicant/recipient should pay past bills, finalize their pre-paid funeral arrangement, and purchase personal items - clothing, medical equipment, eyeglasses, hearing aids, dental work, etc.  Additionally, in those cases where it is expected that the children will need to advance funds to cover out of pocket nursing home expenses not budgeted within the Medicaid Plan, I have the Medicaid applicant/recipient pay off the obligation. 

The obligation is evidenced by a DRA Compliant Demand Promissory Note in favor of the children which states that any amounts advanced by the children are legal obligations of the Medicaid applicant/recipient.  The promissory note is executed at the beginning of the Medicaid Plan.

Also, if the Medicaid applicant/recipient does not have a $1,500.00 face value life insurance policy - exempt resource, I would have them purchase one - Krause Financial Services, LLC, offers a guaranteed issue product.  As a last resort, if funds still exist, I would have the Medicaid applicant/recipient purchase a Stand-Alone Medicaid Compliant Annuity.  The funds will be lost to the nursing home as part of the monthly co-pay amount or under the primary beneficiary designation, but the Medicaid applicant/recipient's Medicaid benefits will never be in jeopardy.

Another strategy is that the Medicaid applicant/recipient could irrevocably pre-pay the attorney for future Medicaid re-certifications - no refund is possible.  The Medicaid applicant/recipient's family will take comfort in knowing that an attorney is involved in the annual Medicaid renewals.

Financial Product Sales in 2008 - Long Term Care Insurance - Medicaid

In 2008, according to a recent poll conducted by the NAIFA's advisorToday.com, annuity sales topped the financial product sales marketplace at 34 %.  Next, whole life sales followed at 25%, term life sales at 16%, disability income sales at 14%, universal life sales at 9%, and long term care insurance sales at 2%.  Did the last statistic surprise you?  

In an article entitled, "Discussing Life Expectancy", which appeared in the March of 2009 edition of NAIFA's advisorToday magazine,  I learned that a married couple has a higher exposure to the risk of living too long than does a single person.  What is the premise behind the argument?  According to the article, the argument is premised on the principle that the life expectancy of two people is greater than the life expectancy of one person.  The article goes on to say if a husband and wife are age 66, there is a 50-percent probability that one of them will live 25.3 years, which is about seven years more than the life expectancy of either the the husband or the wife as a single person.

In light of the above, it is my opinion that if the aforementioned result were to occur, the surviving party will certainly have a higher need for long term care.  Additionally, if the surviving party wants to avoid losing more than half of his or her assets to a long term stay in a nursing home in order to qualify for Medicaid benefits, he or she will need to purchase a long term care insurance policy. In order to get the best deal on a long term care insurance policy, an individual must be less than 80 years of age, and be in good health. 

Finally, in those cases were a couple has explored the opportunity to purchase long term care insurance and one of them is declared uninsurable, based on the aforementioned statistics, the insurable spouse still needs to purchase the long term care insurance coverage. 

Financial Stability of Medicaid Compliant Annuity Companies

For more than 20 years,  I have been offering Medicaid Compliant Annuity products.  With respect to all of the insurance companies that I have dealt with, my favorite has always been Employees Life Company (Mutual) of Lake Bluff, Illinois.  In my office, we refer to the company as "ELCO" 

ELCO is is a small life and annuity insurance company that has been servicing the needs of many since 1946. Because it is a mutual company, all profits accumulate for the benefit  and protection of its policyholders.  At the end of the 2008 calendar year, ELCO had $290 million of total admitted assets, $272 million of total policyholder liabilities, and a $19 million surplus.  Additionally, at the end of the same period, ELCO generated $129+ million of total income, and spent $127+ million on operations, leaving a profit of $1.4 million.  That was an outstanding performance.

For 2009 and beyond, as a result of its conservative approach, I am confident that ELCO will continue to lead the way for Krause Financial Services, LLC., and its ability to provide the best Medicaid Compliant Annuities in those markets where ELCO is licensed to do business.

The 2009 Financial Markets And Community Spouse Cases

Lately, with a plummeting financial market and shrinking investment portfolios, a new trend has emerged.  Community spouses are reluctant to qualify their institutionalized spouses for Medicaid benefits for the fact that their investment portfolios will need to be liquidated.  Is that so bad?  What if the market recovers?  What if it does not?  Is there enough time for a recovery?

In the case of a healthy community spouse, where a substantial amount of the wealth remains, the answer is "absolutely not!"  In such a case, the Medicaid plan will provide an immediate benefit.

Assume for the moment that the husband has gone into the nursing home, and the couple's investment portfolio has lost 30% of its value, or $300,000.00.  The wife would like to wait for the market to recover, but during the wait, she understands that the nursing home will be charging $7,500.00 per month.  Instead, following my plan, the wife opts to retain $100,000.00 of countable resources ("CSRA"), and invests the $600,000.00 spend-down amount into a Medicaid Compliant Annuity ("MCA").

As a result of the plan, the wife retains the family home, automobile, household furniture and personal property, the prepaid funeral arrangements, $100,000.00 of cash, and $7,200.00 of monthly income - most of which came from the MCA.  The plan allows the husband to immediately qualify for Medicaid benefits, with a monthly co-pay of $1,100.00, allowing the couple to save $6,400.00 per month.

Additionally, in order to recover the investment loss, the wife purchases a $300,000 face value life insurance policy, insuring her life.  The primary beneficiary of the life insurance policy is the couple's three adult children.  Further, in order to protect her assets from possible future long term care costs, the wife purchases a long term care insurance policy (LTCIP"), including a return of premium rider, which includes coverage for home healthcare, assisted living, and nursing home care.   As a result of the LTCIP purchase, the wife is certain that she will never have to rely on Medicaid.  Finally, after deducting the life insurance and long term care insurance policy monthly costs, the wife is confident that she has sufficient monthly income to meet her needs.

This is a win, win, and win situation for everyone involved.

Medicaid Compliant Annuity - Primary Beneficiary

In those cases where a community spouse (Mary Smith) purchases a Medicaid Compliant Annuity (“MCA”) with the couple’s spend-down amount,  what happens if the community spouse predeceases the institutionalized spouse?   Assuming the state Medicaid program is the primary beneficiary to the extent that medical assistance benefits were provided to the institutionalized spouse (Robert Smith), is the state’s Medicaid claim frozen at the point of Mary’s death?   Or, in the alternative, does the state Medicaid program have an open claim until Robert’s death?  Does it make a difference if the  MCA allows the primary beneficiary to elect a cash settlement of the remaining monthly payments?   Would it not make sense to state that the primary beneficiary is: “The state Medicaid program to the extent that medical assistance benefits were provided to the institutionalized spouse (Robert Smith);  the claim shall not extend beyond the annuitant’s (Mary Smith) death.”

Medicaid Compliant Annuity Cases - Favorable Decisions

I just reviewed a Nebraska fair hearing decision, involving a community spouse (“CS”) and her purchase of two post DRA Medicaid Compliant Annuities with the couple’s entire spend-down amount.  The fair hearing decision is dated December 30, 2008.

The Nebraska case had facts that were very similar to the facts found in the Weatherbee case,  which was decided in the United States District Court of Pennsylvania -  Western District, on  January 22, 2009.  In the Weatherbee case, the District Judge held that when Congress added additional requirements for annuities, as outlined within the Deficit Reduction Act of 2005 (“DRA”), Congress intended that individuals and/or community spouse’s should be able to transfer countable assets into MCAs, without incurring a transfer penalty. The District Judge further rejected the DPW’s argument that Mrs. Weatherbee’s MCA should be treated as a countable resource in that it may have value on the secondary market; the District Judge held that DPW’s countable resource argument was inconsistent with the treatment of annuities under the Medicaid Act.    

In the Nebraska case, the Director of the Division of Medicaid & Long Term Care (DMLTC”) held that it was proper for the community spouse (“CS”) to purchase the MCAs, thus creating an income stream only for herself.  The Director further held that the institutionalized spouse was eligible for Medicaid benefits, despite the argument by DHHS that J.G. Wentworth had made a contingent offer to purchase the MCA’s.