Although annuities have long been seen as tools for protecting assets from lawsuits and creditors in the U.S., the term “asset protection” today nearly always refers to the sheltering of family assets from the spend-down requirements of Medicaid, most often with respect to payment for nursing home care. The federal Deficit Reduction Act of 2005 set forth standards for specific annuity strategies couples can use to shelter some of their excess assets from spend-down requirements.
What Annuities Are
An annuity is a contract with an insurance company. The consumer pays the company a lump sum of money on which the company pays annual interest in accordance with the contract’s specifications. After a predetermined time, often more than 10 years, the annuity matures and may be paid out as a lump sum to the owner. An alternate arrangement is for the owner to annuitize the annuity, converting the balance into a monthly income stream, usually guaranteed for life. An annuity may be annuitized at any point in its life without penalty or cost to the owner. Annuities come in many types, though the most popular are fixed-interest deferred annuities, equity-index annuities, variable annuities and immediate annuities.
What Is Protected
Only assets specifically invested in an annuity are protected. Owning an annuity will not protect other non-cash assets, such as real estate. In addition, each state sets its own rules for creditor protection; while most states protect annuity cash value and payments from creditors, some states provide no protection at all, while others impose caps or other restrictions on the protection. Assets in an annuity are traditionally beyond the reach of probate courts.
Many older Americans today find themselves in need of full-time long-term care that cannot be provided at home, and thus they turn to nursing homes. The reason Medicaid plays so prominent a role in any discussion of annuities is that it’s the payer of last resort for long-term care. Most people think this care is a medical expense and thus covered by Medicare for those age 65 and older, but this isn’t the case. Because nursing home care is custodial in nature, rather than curative, Medicare doesn’t cover it except in limited circumstances. For instance, Medicare will cover up to 100 days in a nursing home for rehabilitation services following surgery.
Meeting Nursing Home Costs
In 2013, the average cost of nursing home care was a little more than $80,000 annually. Some patients pay from their own savings and other assets, while others have long-term care insurance policies that will meet the costs. Almost two-thirds of all nursing home residents, though, rely on Medicaid to pay for their care. Before Medicaid will begin to pay any long-term care costs, it requires patients to exhaust all but $2,000 of their own assets on such care and can penalize patients who try to divest themselves of assets in the five years before applying for coverage. The Deficit Reduction Act permits the use of annuities to shelter some of a patient’s assets from this spend-down requirement. Annuities purchased to meet this requirement must be irrevocable and immediate: That is, they must begin paying the annuitant immediately, and once purchased, the annuity cannot be converted back into cash at any point in the future.
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