Dear Counselor: Be Cautious If You’re Considering Annuities

Question: I am a senior and widower currently living in my own home. Even though I have managed pretty well for several years, my health is deteriorating. I will likely require skilled nursing care at some point in the next few years. I read your column last fall about Medi-Cal planning and have taken steps to protect my home from any future Medi-Cal estate recovery. But I still have other investments that would make me ineligible for Medi-Cal because my assets exceed the $2,000 limit. I have heard that it might make sense for me to buy annuities with those investments so that I can convert those cash assets to a stream of income. Is that right?

Answer: You have taken some of the appropriate steps to plan for skilled nursing care and preserve your assets for your heirs, but your idea to liquidate your assets to buy annuities is off target. Although annuities might have a place in someone’s portfolio, based on what you have described to me, it is not an answer to your financial dilemma.

An annuity is a contract with an insurance company under which you agree to make a premium payment to the insurer in exchange for the insurance company’s payments to you at regular intervals. Generally speaking, there are two types of annuities, an “immediate annuity” and a “deferred annuity.” An immediate annuity begins with a lump sum payment to the insurer followed by immediate payments to you. Immediate annuities are rare. The more common one is a deferred annuity, which begins with a premium payment to the insurer, followed by a deferral period, after which regular payments will be made to you.

Annuities come with a variety of choices designed to meet the individual’s needs. For example, deferred annuities can have either fixed or variable rates of interest that accrue on the premium payment. There are even rates that are related to certain equity indexes. Some annuities last a lifetime, while others are guaranteed to pay out over a definite period of time regardless of the purchaser’s death. The choices are vast.

The answer to your question about whether annuities are a good Medi-Cal planning strategy is no. Assuming that you qualify for Medi-Cal because you have less than the $2,000 asset limit, the stream of payments that you receive from the annuity will be counted as income by Medi-Cal. That income will go to the nursing home as part of your “share of cost” of monthly payments. In addition, if you have an annuity that offers any residual payout benefit upon your death, that payment will be subject to recovery by Medi-Cal from your estate. Thus, buying an annuity now provides no benefit to you for Medi-Cal purposes.

There are a number of ways in which you can spend this money to make yourself eligible for Medi-Cal. In your situation, you may want to consider spending this money on exempt assets, i.e. assets that are not counted by Medi-Cal for eligibility purposes. For example, you could use the money to make your principal residence as comfortable as possible given your condition. If you need to remodel the bathroom, install handrails around the house, or increase the width of doors for a wheelchair, then do it with that money. Your vehicle is also an exempt asset, so now may be the time for that fancy sportscar.

If you are still considering annuities outside of any Medi-Cal planning purpose, you should seek advice from a well-qualified financial advisor. Seniors are often targeted by annuity sales scams as part of an overall estate plan. Beware of the “Free Living Trust Seminar.” The senior receives a flyer for a free living trust seminar, which is hosted by an attorney offering a free lunch – a big red flag as there is no free lunch, and certainly no free lunch from an attorney. At the seminar, there may be discussion about estate planning, but there may be an ulterior motive. Frequently, the attorney’s assistants, known as “trust advisors” or “estate planners,” consult with the seniors to find out where the seniors’ investments are. That’s when the sales pitch begins for insurance products.

In the world of annuities, you are well advised to look before you leap. When it comes to annuities and Medi-Cal, it is probably best to look carefully.


Preston Morgan is a partner at Kopper, Morgan & Dietrich, a Davis law firm providing family law, estate planning and trust litigation representation. His column is published every other week in the Davis Enterprise. To pose a question to Preston Morgan, contact him at https://kopperlaw.com.

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By | 2017-09-20T08:51:20+00:00 August 7th, 2016|Dear Counselor|0 Comments

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