Top Ten Estate Planning Mistakes
#7—Purchasing an Annuity

  What is the worst investment you have ever made?  Did you buy GM right before the bankruptcy?  Did you invest with Bernie Madoff?  Surprisingly, the purchase of an annuity may now rank as one of the worst investments you can make.

Indiana has announced changes to its Medicaid rules, for non-qualified annuities purchased on or after November 1, 2009.  These rules are particularly harsh for the annuity industry.  We refer to these rules as the “whack the annuity sales person” game.  These rules also apply to non-qualified annuities purchased prior to November 1, 2009, if you engage in a “transaction” with the annuity company, such as taking some money out of your annuity, putting more money into the annuity, changing the beneficiary, etc.

The new rules require you to name the State of Indiana as the primary or contingent beneficiary when you purchase a non-qualified annuity.  The term non-qualified simply means you are putting after-tax money into the annuity while a qualified annuity is purchased inside an IRA, 401K, or other pre-tax retirement investment account.

When you purchase a non-qualified annuity, you can name your spouse, a minor child, or a disabled child as the primary beneficiary.  You must then name the State of Indiana as the contingent beneficiary for any medical benefits paid on behalf of you or your spouse.  You must name the State of Indiana as the primary beneficiary - if you do not have a spouse, minor child, or disabled child - with your children named as the contingent beneficiary.

The consequences of not correctly naming the beneficiary are severe.  The annuity purchase is considered a “transfer” under the Medicaid rules.  The amount invested in the annuity will be divided by the average cost of nursing home care in Indiana to create a period of ineligibility for Medicaid for nursing home care at any point in the next 5 years (possibly longer) when husband or wife are in the nursing home and run out of money to pay for their care.

We know many inappropriate annuities are sold to unsuspecting seniors.  In the past, this would simply be a bad investment—with the law change, this could be a devastating investment for mom or dad.

This is best explained by an example.  Dad has Alzheimer’s.  Mom goes to the bank to buy a CD.  The bank representative tells mom interest rates are low and recommends she purchase an annuity from the bank’s related investment company.  Mom purchases a non-qualified annuity for $50,000 without naming the State of Indiana as a beneficiary.  She has now made herself and her husband ineligible for Medicaid for 10 months should either of them need nursing home care in the next 5 years (possibly longer) even if they later take the money out of the annuity and use it to pay for nursing home care.

This is a bad investment!

Keith P. Huffman
October 2009
Revised November 2009

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