MONAELA - Annuities 11/28/2016. About Krause Financial Services (KFS) What is an annuity? Presented By Stuart Otto. Two Types of Annuities

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1 MONAELA - Annuities Presented By Stuart Otto medicaidannuity.com 1234 Enterprise Drive De Pere, WI (866) About Krause Financial Services (KFS) The only attorney led Financial Firm that specializes in Medicaid Compliant Annuities and other crisis planning tools. Widely considered the leaders in the industry with over 25 years experience. The Krause Agency (TKA) is a subdivision of KFS strictly devoted to insurance agents. 4 qualified KFS Planners on staff to assist with your annuity cases Located in De Pere (short drive from Lambeau Field) What is an annuity? An insurance vehicle designed to provide income to the owner throughout his/her retirement. Two Types of Annuities Immediate Annuity= Income Deferred Annuity= Growth Annuitization is the process of converting a Deferred Annuity into an Immediate Annuity. Note: MO HealthNet Compliant Annuities are ALWAYS IMMEDIATE ANNUITIES. Deferred Annuities are not DRA compliant. 1

2 Immediate and Deferred Annuities Immediate Annuity Options Life only Life with Period Certain Period Certain Inflation rider Can be funded with IRA money or after tax money May be sold in the secondary market Deferred Annuity Options Fixed income rate Investment options Usually a combination of both more aggressive approach when contract owner is younger Long Term Care Rider Can be funded with IRA money or after tax money The Parties to an Annuity Contract Owner person/entity who purchases the contract Annuitant who s life the annuity contract is measured by Beneficiary recipient of death proceeds when annuitant passes Insurance Company issues the annuity contract and assumes a number of financial obligations to the owner, the annuitant, and the beneficiary Annuities and MO HealthNet Must pass the Annuity Transfer rules found in the Missouri Income Maintenance Manual Is owned by the community spouse or institutionalized spouse Is irrevocable and non assignable Is actuarially sound Provides equal or nearly equal payments for the duration of the annuity with no deferral and no balloon payments; and Provides for the appropriate beneficiary options. 2

3 What does the Missouri Income Maintenance Manual tell us? MO HealthNet applicants can own an annuity. But. Must be Immediate / Not Deferred Note: all MO HealthNet Compliant Annuities are Immediate annuities BUT not all immediate annuities are MO HealthNet Compliant Must be a Period Certain Annuity No inflation riders Structured correctly, the MO HealthNet Compliant is not a transfer for less than fair market value. Nor is it an asset. Treated as income only Spend down planning with Annuities Community Spouse (CS) Annuities Gifting plans Planning with IRAs Name on the check rule Planning for client with no longevity The VA Annuity Community Spouse Annuities. Some basic things to know when planning: Snapshot Date CSRA Community Spouse Resource Allowance Countable Assets How much? What accounts? Tax status? Ownership? Have your clients exhausted all of their spend down options? (funeral plans, vehicle upgrades, etc.) 3

4 Quick rundown of a Community Spouse spend down case Snap shot date countable assets on that date established CSRA is determined using the assets as of the snap shot date The difference between the current assets and the CSRA is the Spend down Amount Client purchases pre paid burials, upgrades to home made, new vehicle purchased, etc. Finally, once all spend down options have been exhausted, the MO HealthNet Compliant Annuity is purchased (see case study in handouts) What to consider when determining the appropriate term for a Community Spouse Health of the Community Spouse Amount of money going into the annuity What is his/her income? How much income is needed to live comfortably in the community? Can he or she receive an income shift from the Institutionalized Spouse? Does the Community Spouse have LTCI? Family History What is the tax status of the annuity funds? Provisions of a Community Spouse Annuity Irrevocable Non assignable Provide equal payments / no deferral or balloon Actuarially Sound List the Institutionalized Spouse as Primary Beneficiary (this is a requirement) State is Contingent Children are Tertiary 4

5 Benefits of a Community Spouse (CS) Annuity Institutionalized spouse (IS) obtains immediate MO HealthNet eligibility in that no transfer of assets occurred Income from a CS annuity is payable to the CS / not the IS Full return of principle, plus interest, to the CS if he/she survives the annuity term. IS is primary beneficiary / state has no claim to the death benefit if the CS predeceases the IS Even if the state recoups what they paid to the IS, they still only paid at the MO HealthNet reimbursement rate Shifting of income from IS to CS in certain cases, reduces MO HealthNet copayment Annuities in Gifting Cases Mostly used in single client cases Plan is strategically structured for the annuity to provide income to pay though a MO HealthNet period of ineligibility Benefit of the plan is transfer of wealth to the applicant s beneficiaries / often at least 50% Must be: Irrevocable and non assignable Provide equal payments Actuarially sound List the state as primary beneficiary Some things needed before considering a gifting plan Is the MO HealthNet applicant married? What are your client s assets? Both countable and non countable. Are their any IRAs or annuities? What is the longevity of the Medicaid applicant? Nursing home cost / other medical expenses Client s monthly income Prior gifts? 5

6 Quick rundown of gifting case with an annuity Client has $50K to spend down Gifts $25K for a penalty of just over 5 months ($25K / $4889) MO HealthNet Annuity purchases with $25K to provide income for 5 months Annuity payment begins in the same month the period of ineligibility starts Each month, client uses annuity income to pay the nursing home Benefit of the plan: after 5 months: the annuity s exhausted, client is on MO HealthNet, and the gift of $25K has been protected See case study for more in depth review Gift to Tax-Deferred annuity In gifting plans, the giftee(s) receive a significant lump sum of money that they aren t sure what to do with Consider an ELCO Tax Deferred Annuity: Competitive interest rates No annual administration fees May be Annuitized at any time with no charge Can be converted into MO HealthNet Compliant Annuity deferred annuities Contact our office for more information Funding a Tax-Qualified (IRA) MO HealthNet Compliant Annuity 3 methods Trustee to Trustee Transfer (a.k.a. company to company transfer) consists of two companies working together, at the applicant s request, to transfer his/her money to the new company. The downside of a Trustee to Trustee Transfer is that this process can take between two weeks to two months to complete, thus delaying eligibility until the transfer is complete Direct Rollover A direct rollover consists of the applicant requesting that the current custodian company make the payment directly to the insurance company issuing the MCA. 6

7 Funding a Tax-Qualified (IRA) MO HealthNet Compliant Annuity continued 60 Day Rollover A 60 day rollover consists of the applicant contacting the current custodian company holding the tax qualified funds and initiating a complete liquidation of the account without withholding any taxes. The liquidation check is usually received within five to seven business days of the request and must be used to fund another tax qualified account within 60 days Pursuant to Bobrow v. Commissioner the IRS has announced they will apply the Bobrow interpretation of 408(d)(3)(B) to any rollover that involves an IRA distribution after January 1, Section 408(d)(3)(B) provides that an individual is permitted to make only one rollover in a 1 year period. What to consider when buying an annuity with an IRA or Tax-Deferred Annuity What is the value of the accounts being rolled over? What is the annuity term your client is considering? Remember the MO HealthNet annuity payments are taxable. The longer the term, the more beneficial it is from a tax perspective. What funding method are you considering? Is your client seeking immediate MO HealthNet eligibility? Who owns the IRA or Tax Deferred Annuity? Bottom line: is the potential tax hit big enough to risk losing 1 2 months of MO HealthNet? Always seek the advise of a professional tax advisor in these matters. Name on the Check Rule The Name on the Check Rule is addressed in U.S.C. 1396r 5(b)(A): Non Trust Property Subject to subparagraphs (C) and (D), in the case of income not from a trust, unless the instrument providing the income specifically provides: If payment of income is made solely in the name of the institutionalized spouse or the community spouse, the income shall be considered available only to that respective spouse; 7

8 How the Name on the Check Rule can help your clients? IS owns a large IRA / cashing out would result in significant tax hit IS purchases a MO HealthNet Annuity with his IRA / listing the CS as the primary beneficiary AND payee No tax implications on the purchase because it was properly rolled over IS obtains immediate MO HealthNet eligibility without increasing his MO HealthNet copayment Client Without Longevity MO HealthNet applicant is terminally ill and isn t expected to live 6 12 months Instead of gifting to preserve 50% of the spend down / MO HealthNet applicant purchases MO HealthNet Annuity with the spend down amount Stretches the annuity term over his/her life expectancy Lists the state as primary beneficiary / kids as contingent Client obtains immediate MO HealthNet eligibility Results of plan client without longevity MO HealthNet applicant passes away after 6 months Remaining payments are converted to death benefit Death benefit is high because only 6 payments were made Missouri s claim to the death benefit is small because they only provided benefits for 6 months The contingent beneficiaries will receive the remaining death benefit / which should be greater than 50% of the original spend down amount The longer the client is expected to live, the less advantageous this plan becomes. (Please see the case study for a more detailed analysis) 8

9 VA Planning with Annuities UME: unreimbursed medical expenses IVAP: income for VA purposes UME client s income = IVAP IVAP must be negative to receive the Aid & Attendance benefit If the anticipated VA benefit provides enough income to pay for the client s UMEs, no annuity would be needed However, if the IVAP is large enough to where the anticipated benefit doesn t cover the shortfall, client may want to consider purchasing a VA Annuity to bridge that gap VA Annuity Revocable Beneficiary Designation Assignable / ownership can be changed No cash or surrender value Can be converted into a Medicaid Compliant Annuity Change the beneficiary and make the contract irrevocable Convert contract to non assignable Can be funded with IRA and after tax dollars Things to know about our MCAs at Krause Financial Services Shortest annuity term = 2 months MIN investment amount = $5, No MAX investment or term Annuity can be funded with IRA or after tax money Dale s Fair Hearing support and testimony available for appeals 9

10 ELCO Annuity Applications There are two ELCO Annuity Application Packets Always contact Krause Financial Services prior to making an annuity purchase with your client. DO NOT USE WHITEOUT. DO NOT USE WHITEOUT. Applications vary from state to state. If your client is signing somewhere other than MO, let me know first in that different forms may be required. Questions????? Thank you for attending our session! Stuart Otto Benefits Planner P