USE OF ANNUITIES IN MO HEALTHNET & VA PLANNING

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1 USE OF ANNUITIES IN MO HEALTHNET & VA PLANNING Dale M. Krause, J.D., LL.M MO NAELA Annual Elder Law Symposium December 5, 2014 How We Help YOU Your #1 source of MO HealthNet and Veterans Benefits planning insurance products This is all we ve been doing for 25+ years Birds eye view of how other Missouri practitioners are planning We share what works and what doesn t, based on your fellow practitioners Your go to source for planning resources We keep you informed of MO HealthNet figure updates, rule changes, and new case decisions Why YOU Can Rely on Us $243 $163 $ $ Total Annual Premium Number of Cases Closed Total Insurance Agents Total Attorneys

2 Where Will Your Clients Turn First MO HealthNet or VA? Most likely Veterans Benefits, given the typical trajectory of long term care needs: Homecare assisted living nursing home Where in the trajectory of long term care would you implement VA planning for your clients? Consider VA Planning When Your client is a qualified veteran or surviving spouse of a qualified veteran; They are receiving homecare or are a resident of an assisted living facility; They have a condition that is not expected to improve; and They have excess countable assets. What is the VA Benefit? 2014 Aid & Attendance Pension Benefit Veteran Married Veteran Veteran Needs Care Surviving Spouse $1,758/Month $2,085/Month $1,130/Month $21,096/Year $25,020/Year $13,560/Year This benefit is available to eligible veterans and their surviving spouses to help pay for costs associated with long term care. 2

3 Aid & Attendance Pension Benefit Basic Eligibility Requirements Non financial Qualified veteran 90 days active duty (one day during wartime) Military Discharge other than dishonorable Disabled and in need of daily care Financial Income less than unreimbursed medical expenses Countable assets between $15,000 and $30,000 depending on age Veterans Benefits - IVAP IVAP Income for VA Purposes Calculated by subtracting the recurring monthly unreimbursed medical expenses (UME) from the claimant s monthly income Goal is to have an IVAP of $0, or less An IVAP over $0 reduces the Maximum Annual Pension Rate ( MAPR ) dollar for dollar IVAP < $0 IVAP > $0 but < MAPR = IVAP > MAPR MAPR MAPR IVAP Not entitled to VA benefit We ve all heard the stories of pension poachers and annuity salesmen preying on veterans and their families. Why would you use one? ANNUITIES AND VETERANS BENEFITS PLANNING 3

4 Be Wary of VA Planning Specialists These specialists encourage claimants to gift excess assets to children, and have the children purchase indexed annuity products No liquidity + high surrender charges = high commissions for the specialist What if the claimant later transfers to a nursing home and seeks MO HealthNet? Top Reasons to Use an Annuity in VA Planning No. 1 Reason: Convert excess countable assets into an income stream No. 2 Reason: Provide a safe investment vehicle when gifting assets Reason 1: Converting Excess Net Worth Use an immediate annuity does not need to meet the requirements of DRA Income only No cash value Can be structured with level income, or balloon payments, or a combination of products may be used TIP: Look for a product with flexibility for future life changes 4

5 Immediate Annuity Level Payout Most common in VA planning Typically structured with a term not exceeding MO HealthNet life expectancy Not a VA requirement purely to avoid precluding a future MO HealthNet application Immediate Annuity Balloon Payout Commonly used with IRAs in VA planning Can be structured with a term exceeding MO HealthNet life expectancy due to DRA s preferential treatment of IRA annuities Can be used to prepare for cost of living increases Reason 2: Safe Investment Vehicle Use a short term deferred annuity To avoid precluding a future MO HealthNet application Usually owned by an irrevocable trust Cannot be owned by the claimant and/or spouse or would be a countable resource Not as common, or as recommended, as using an immediate annuity TIP: Look for a product with no, or very low, surrender charges 5

6 What if the VA Claimant needs MO HealthNet benefits in the future? By using an immediate annuity containing certain flexibility provisions, the owner can: Make it compliant with DRA (e.g. irrevocable, non assignable, MO HealthNet agency as beneficiary) OR Sell it on the secondary market Use the sale proceeds in an alternate plan to establish MO HealthNet eligibility Veteran s Benefits Planning Case Study MEET TOM SELLECK About Tom 79 year old Korean War veteran Recently lost his wife primary caregiver Sold the family home $155,000 in savings $1,200 in monthly income Entered an assisted living facility charging $3, per month for his care 6

7 What is Tom Worried About? Running out of money Current life savings will only last for 41 months Eviction Does not want to be forced into nursing home What is Tom Not Worried About? Leaving an inheritance for his three children He believes that they are all financially stable Tom s Goal Obtain the VA Aid & Attendance monthly pension benefit, which will provide him with sufficient income to maintain his lifestyle and continue residing in an assisted living facility. 7

8 Tom s Monthly Expenses UME $4,236 Assisted Living $3, Medicare Part B $ Medicare Supp. $ Other $ Cable Television $71.94 Cell Phone $76.60 Automobile Insurance $52.13 Entertainment & Incidentals $ Grand Total Total Monthly Expenses $4, Tom s IVAP Income for VA Purposes Income $1,200 UME $4,236 IVAP ($3,036) What Does Tom s VA Plan Look Like? Estate Planning Legal Fees $7,500 Outstanding Bills $5,000 Pre Paid Funeral Plan $10,000 Retain Assets in Savings $30, Month Level Pay Immediate Annuity $102,500 All the Above Equate to Tom s Life Savings $155,000 8

9 Level-Pay Immediate Annuity Single Premium Period Certain Monthly Payment Total Payout $102, Months $1, $104, The period certain was determined based on Tom s monthly income need, but stayed within his MO HealthNet life expectancy 8.63 years/ months. VA Eligibility: Income Calculations Total Monthly Income $2, UME $4,236 IVAP ($1,329.57) IVAP ($1,329.57) VA Benefit $1,758 Excess Income $ Why is there Excess Income? So Tom can cover his non medical monthly expenses: Cable Television $ Cell Phone $ Automobile Insurance $ Entertainment & Incidentals $ $

10 Economic Results $4, total monthly income $4, total monthly expenses No need to take from $30,000 retained in savings Can be used for increases in cost of care Tom will not accumulate excess monthly income which would be an issue during his annual review Advantages of the Plan Tom passes after residing in the assisted living facility for 45 months $79,110 of VA benefits received ($1,758/mo.) Maintained control of his money throughout his lifetime and received the care he needed Ultimately provided a wealth transfer of $47, to his children $27, remained in his annuity $20,000 remained in his savings account An alternate Veterans Benefits planning technique for larger net worths. WHAT IF TOM HAD A LARGER NET WORTH? 10

11 More Assets Let s say Tom has $202,500 to invest Yet he still only needs $1, of income How can he generate the limited income he needs with such a large investment? Use a Balloon & Level Combo Plan Term 103 Months Investment Monthly Payout Balloon Payment Total Payout $168, $1, N/A $173, $33, $26.37 $32, $35, Total: $202,500 $1, Able to generate needed income Total Income $4, Medical Expenses $4, The MO HealthNet contingency aspect of Tom s Veterans Benefits plan. WHAT IF TOM S HEALTH DETERIORATES? 11

12 Nursing Home Care Assume Tom enters a nursing home in month 45 He wants to immediately Merge onto the MO HealthNet Highway Tom has two options: Option 1: Sell his annuity on the secondary market Option 2: Make the annuity compliant with DRA (he used a unique product specifically designed to do so) Option One: Selling the Annuity Step 1: Sell the annuity Family member or on the secondary market J.G. Wentworth Step 2: Proceed with a Gifting/MO HealthNet Compliant Annuity Plan Use the annuity sale proceeds and funds left in his savings We ll show you how to do this shortly Step 3: Apply for MO HealthNet Will be ineligible due to gift eligibility will exist thereafter Option Two: Abiding by DRA Step 1: Convert current annuity into an MO HealthNet Compliant Annuity Made non assignable, irrevocable, and MO HealthNet named as primary beneficiary Step 2: Purchase a second MO HealthNet Compliant Annuity This reduces countable resources to $2,000 Step 3: Apply for MO HealthNet Co pay equals social security and annuity income, less a personal needs allowance and any supplemental insurance 12

13 What does it even mean to have an annuity that abides by DRA? USING AN ANNUITY IN MO HEALTHNET PLANNING When Would You Consider Using an MO HealthNet Annuity? A Potential Applicant Must be a resident of an MO HealthNet-approved nursing home; be expected to remain at the facility indefinitely; Have exhausted all of his or her Medicare benefits; and have been asked to self-pay and have excess countable assets. MO HealthNet Basic Eligibility Requirements Non financial U.S. citizen or qualified alien Age 65+ or disabled Financial Income less than the MO HealthNet rate of nursing home Countable assets for a single person $ Countable assets for a community spouse $23,448 to $117,240 Applicants may need to spend down 13

14 Eliminating Excess Assets Spending Down Spending down can occur by: Paying the nursing home Paying off mortgages, credit cards, and other bills Purchasing or improving non countable resources: The family home, new car, household furnishings, and funeral trusts Converting excess countable assets into a properly structured immediate annuity Annuities and MO HealthNet The only type of annuity that works for MO HealthNet planning is an immediate annuity Not a tax deferred annuity in light of cash value Planning with immediate annuities has been used for many years Omnibus Budget Reconciliation Act of 1993 As a result of the Deficit Reduction Act of 2005 ( DRA ), immediate annuities used in MO HealthNet planning must meet strict requirements MO HealthNet Compliant Annuity What is an MO HealthNet Compliant Annuity? A contract with a commercial company that is used to convert a spend down amount (excess countable assets) into an income stream Very few companies offer such a product Interest rates are too low they cannot make money Must be irrevocable, non assignable, actuarially sound, make equal monthly payments, and name the state as beneficiary Missouri s Take: An institutionalized spouse must be named before the state as a beneficiary. 14

15 How DRA Applies to IRAs Does DRA apply to annuities holding tax qualified funds? Per DRA, annuities are not considered assets if: Purchased with proceeds from (a), (c), or (p) of 408 or IRC 1986 OR Are irrevocable, non assignable, actuarially sound, and provide for payments in equal amounts Missouri s Take: The state must still be named as a beneficiary on IRA annuities. In a community spouse case, the name on the check rule is reportedly recognized. MO HealthNet Compliant Annuity case study for a single individual with an anticipated normal longevity. MEET JANE FONDA About Jane 85 year old widow in a nursing home with excellent physical health, but a cognitive impairment Spend down amount of $222,000 Income $1,200 Nursing home cost of $5,800 15

16 Jane s Goal Make a wealth transfer to her children Qualify for MO HealthNet benefits as soon as possible Strategy: Gifting/MO HealthNet Compliant Annuity Plan Step 1: Determine the Length of the Plan Income Shortfall $4,600 Divestment Penalty Divisor $4,744 Burn Rate $9,344 Spend Down Amount $222,000 Burn Rate $9,344 Term of Plan Mo. Step 2: Determine the Gift Amount Term of Plan 24 Mo. Divestment Penalty Divisor $4,744 Immediate Gift Amount $113,856 Note: The annuity cannot be structured for a fraction of a month round to an even figure. 16

17 Step 3: Determine the Annuity Investment Spend Down Amount $222,000 Immediate Gift Amount $113,856 Annuity Investment $108,144 Investment Amount Period Certain Monthly Payout Total Payout $108, Months $4, $108, Step 4: Making the MO HealthNet Application Transfer the gift to intended heirs Purchase the MO HealthNet Compliant Annuity Make the MO HealthNet application Note: The above should all occur within the same month. Economic Results Jane is ineligible for MO HealthNet for 24 months divestment penalty period Jane has total monthly income of $5, Jane incurs a monthly shortfall of $65.86 Jane s total shortfall is $1, Jane is eligible for MO HealthNet in month 25 17

18 What if Jane had a Diminished Life Expectancy Less Than 24-Months? Instead of opting for a gifting plan, she would opt for a stand alone MO HealthNet Compliant Annuity Step 1: Eliminate the Spend-Down Amount The spend down amount of $222,000 is immediately eliminated by: Retaining $ as her personal needs allowance Purchasing a $221, MO HealthNet Compliant Annuity Investment Amount Period Certain Life Expectancy Monthly Payout Total Payout $221, Months $2, $225, Step 2: Apply for MO HealthNet Jane is immediately eligible for MO HealthNet benefits Jane s monthly MO HealthNet co pay to the nursing home is $3, How did we determine that? 18

19 MO HealthNet Co-pay Calculations Social Security Income $1, Annuity Income $2, Total Income $3, Less Personal Needs Allowance $ Monthly MO HealthNet Co Pay $3, Step 3: Repay the State Jane passes away 20 months into the plan The state MO HealthNet agency is the primary beneficiary and is owed $11, How did we arrive at that figure? Repayment Calculations Monthly MO HealthNet Rate $4, Less Jane s Monthly Co pay $3, Monthly MO HealthNet Bill $ MO HealthNet Bill $ Months on MO HealthNet $11, Owed to MO HealthNet 19

20 Step 4: Determine Wealth Transfer Jane s children are the beneficiaries after the MO HealthNet agency Her children will receive a wealth transfer of $158, How did we arrive at that figure? Wealth Transfer Calculations Anticipated Annuity Payments $225, Less Payments Received by Jane $ 55, Less Payment to the State $ 11, Wealth Transfer $158, Advantages Jane was immediately eligible for MO HealthNet benefits Jane realized a monthly savings of $1,300, for a total savings of $26,000 Private pay rate of $5,800 versus MO HealthNet rate of $4,500 Jane s children received a wealth transfer of $158, Secondary beneficiaries 20

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