ARE ANNUITIES THE DEVIL THEMSELVES?
Annuities, the Different Viewpoints
Why I See It Differently
Legal Solution Coupled with Financial Solution
Lump Sum Gifts and Medi-Cal Penalty Periods
Diversification for Liquidity
Tax Deduction for Medical Expenses
Dear Mr. Miller:
Introduction: I am taking care of my Dad and his finances. He is 77 years old and in an assisted living facility. He’s a veteran and we want to obtain the Veterans Aid & Attendance Non Service Connected Disability Pension for him. I was told by a financial advisor that we should take his $180,000 CD, transfer it to my name in one lump sum so his net worth comes down to $30,000, and purchase an annuity with the CD proceeds. I then spoke to a lawyer who indicated that was just the worst idea ever and that annuities are just bad.
What’s the truth?
Son Not Wanting to Screw Up
Annuities, the Different Viewpoints: I don’t agree with the financial advisor or the lawyer. First, annuities are a financial tool; just like a CD, a stock, a bond, or a myriad of other types of investments. They each have their pros and cons. I do know that financial advisors love annuities because that’s what they sell. That’s not necessarily a bad thing, just a fact. A few lawyers with whom I have spoken think that annuities (and some of them would also apply this to life insurance) are the devil themselves. At least some of these lawyers do not have a very deep understanding of this investment type. (back to top)
Why I See It Differently: Even though I am a lawyer, I see things differently then this group of nay sayers. Long ago, I went through the Certified Financial Planner series of courses. Even had the CFP after my name for a few years. Then, when some of my clients started getting confused about what I do and asked me to invest for them and the governing board wanted to start charging a yearly fee for the use of the designation, I relinquished it. Nevertheless, other than law school, it was one of the best series of courses I have ever pursued.
Here’s my take: I am quite sure that there is no investment that is right for everyone and I am reasonably sure that there is no investment that is wrong for everyone. And that statement applies equally to annuities. It just depends on the situation and the goals. (back to top)
Legal Solution Coupled with Financial Solution: Sometimes, lawyers get caught up in the legal solutions, forgetting that in these situations, legal solutions and financial solutions can often be combined to have a far better outcome for the client than either one alone. If an annuity (1) can gain a better return, (2) has good liquidity, i.e. you can cash it in if needed without a huge surrender charge (and remember, CDs have an early surrender charge, too), and (3) is reasonably safe, then an annuity would probably be a better choice than the CD.
In your Dad’s situation, it might make great sense. A one year CD, as of the writing of this column (October, 2014), is earning about 1%, maybe slightly higher. Not a whole lot in terms of investment return. There are annuities that exist that pay a greater return and can be liquidated without a surrender charge if your Dad’s health continues to decline and he needs a skilled nursing facility. Further, the California Life & Health Insurance Guarantee Association insures these products against a member insurer becoming insolvent. (Note that with all insurance, including FDIC, there are limits to the coverage.) If done correctly (see below), the result is more money coming in to help Dad get the best care possible, but that money not being counted as “Dad’s” for purposes of the VA benefit or Medi-Cal. (back to top)
Lump Sum Gifts and Medi-Cal Penalty Periods: But I don’t agree with the financial advisor, either. If your Dad does need a skilled nursing facility in the near future, the cost is going to be more than the assisted living residence he is in now. If it is acute or subacute care, costs can be $10,000-20,000 a month and up. But because of the lump sum gift that the advisor is pushing, your Dad will be ineligible for Medi-Cal for over 20 months. At $15,000 per month that is $300,000 in lost Medi-Cal benefits. A competent California elder law attorney would advise you to use a technique known as stacked gifting to a QVap or QMap Type Trust before investing in the annuity to bring that penalty period down to maybe one or two months. (back to top)
Diversification for Liquidity: Further, you don’t want to put all of your eggs in one basket. So you might want to keep $50,000 in a cash account and put the rest in the annuity. Then if your Dad’s needs spike at the Assisted Living Facility, you can make ends meet for a while on the $50,000 until he moves to a Skilled Nursing Facility and qualifies for Medi-Cal. (back to top)
Tax Deduction for Medical Expenses: And if all of this is done correctly, you, personally, might even be able to get a tax deduction for the medical expenses for your Dad. (back to top)
Conclusion: But every case rests on its own facts and circumstances. Find an attorney who has experience in this field and is not dead set against (or ignorant of) financial solutions. A very good book on this topic, (I co-authored the San Diego edition, the first edition in California) by a good friend and recognized expert on the financial solutions available in this field is Don’t Go Broke in a Nursing Home. (back to top)