This blog is written by Brian E. Barreira, an estate planning, probate and elder law attorney with offices at 18 Samoset Street, Plymouth, Massachusetts, and 175 Derby Street, Unit 19, Hingham, Massachusetts. Brian was named a Massachusetts Super Lawyer® in Boston Magazine in 2009, 2010, 2011 and 2012 and is listed in The Martindale-Hubbell Bar Register of Preeminent Lawyers in the fields of Elder Law and Trusts & Estates, Wills & Probate. Brian's biographical website can be found at SouthShoreElderLaw.com
Nothing on this blog should be considered to be legal advice or tax advice.
Should You Ever Buy an Immediate Annuity at a Bank?
The “financial consultants” or “investment advisors” at banks don’t seem to know much about how MassHealth works, so my suggestion is that you never buy an immediate annuity at a bank without running the idea by an elder law attorney, such as one found via the National Elder Law Foundation.
Within the past month, a financial planner at a Plymouth bank suggested that one of my clients, a married person who has been diagnosed with Alzheimer’s disease, buy an immediate annuity with the funds in his IRA. This pressurized sales attempt occurred after his wife explained that she had met with me and that the plan was to be moving funds to her name.
The relentless selling of annuities at that bank appears to have no bounds. The clients involved in this situation were initially pressured by other people at the bank to meet with the financial consultant, then tried to cancel and received further pressure to keep the appointment.
Here’s why that financial consultant’s annuity idea was atrocious: When one member of a married couple buys an immediate annuity (which can be similar to buying a short-term pension) and soon thereafter needs nursing home care, that check will continue to be received by the institutionalized spouse, and will be treated as the institutionalized spouse’s income for MassHealth purposes. Therefore, the funds that were invested into that immediate annuity, which could have been preserved for the at-home spouse if sensible financial planning had been done, usually are essentially lost. (For further explanation, see Protecting Assets and Maximum Income for the Community Spouse When Applying for MassHealth in 2013 to Help Pay for the Unhealthy Spouse’s Nursing Home Bills in Massachusetts)
You might think that someone who claims to have been an investment advisor for many years would have learned in detail about how annuities are treated by MassHealth, but you should not ever make that assumption when you are dealing with a bank. That is yet another reason not to be buying annuities at banks, where they may not even realize that they are causing financial harm to some married senior citizens.
Should You Buy a Deferred Annuity at a Bank?
Many of my clients walk into banks where they used to be able to trust in the safety of their investments, and are concerned about how little the interest rates are. Many banks have now “investment advisors” available, and elderly clients are shown that they can receive a higher interest rate on a deferred annuity that they could receive on a Certificate of Deposit. It is my understanding that tellers and bank managers may be receiving bonuses or other perks for identifying customers who could be sold an annuity.
Elderly clients trust the bank, and do not realize that the “investment advisors” and the bank will receive a healthy commission for making the annuity sale. Elderly clients who are sold deferred annuities often do not understand that if they want their money back, surrender charges will apply. That means they can lose a substantial amount of the original money placed into the annuity.
When one member of a married couple buys a deferred annuity and soon thereafter needs nursing home care, to obtain MassHealth coverage we often have no choice but to surrender the annuity and get stuck with the surrender charges. That is a reason not to be buying annuities at banks, where just about the only point they tell you about is that you’ll receive a higher interest rate.
I recently met with an older client who had no home and an investment portfolio of less than $300,000, including a speculative penny stock she had recently bought for $80,000 that was now worth only $20,000. It was apparent to me that her stock broker lacked any common sense and was putting her into gambles, so I referred her to a financial adviser that I trust. We have since learned that the failed stock broker has now been hired to be a “financial advisor” at a large bank. The fact that he is still in the financial business and will no doubt be convincing older people to purchase annuities that they do not need is one more reason not to be buying annuities at banks.
A deferred annuity is almost never helpful from a Medicaid or MassHealth standpoint (despite whatever someone selling an annuity says).
For older married couples, the correct first move if one of them enters a nursing home is to move all assets into the name of the healthy one. (See Protecting Assets and Maximum Income for the Community Spouse When Applying for MassHealth in 2013 to Help Pay for the Unhealthy Spouse’s Nursing Home Bills in Massachusetts.) That means the ownership of any annuity in the name of the institutionalized spouse has to be changed to the name of the at-home spouse; unfortunately, if that move is not allowed, the annuity has to be surrendered, and the surrender charges have to be paid. In particular, an annuity owned by the IRA of the institutionalized spouse always has to be surrendered, as there is no other way to transfer that asset directly to the name of the at-home spouse.
There is another type of annuity that can sometimes help preserve assets upon a nursing home stay and a MassHealth application, but that annuity (known as an immediate annuity) is a lousy investment and does not have to be purchased — and usually should not be purchased — until around the time of a MassHealth application.
Where a deferred annuity is never the right type of annuity for MassHealth purposes, why should anybody ever be buying it or selling it in the first place if the elderly person has future MassHealth concerns? (See Is It a Good Idea for an Elderly Person to Purchase a Deferred Annuity? )
Should Massachusetts Law Be Changed to Require That Commissions on Annuities Be Disclosed in Writing?
I do not understand why there is no Massachusetts law that requires annuity salespersons to disclose their commissions in writing to the annuity purchaser. Some annuity salespersons are asked by customers about what their commission is but have been trained to avoid the question by answering that the annuity company takes care of the commission. This deviousness causes consumers not to be able to evaluate the personal financial motivation of the annuity salesperson.
One of my clients has even told me he considered the annuity salesperson to be his friend because he never saw any commission and didn’t get charged for the annuity.
I have been seeing an increasing number of older clients who have purchased (or, perhaps more accurately, have been talked into buying) a deferred annuity. Sometimes the annuity fits into the client’s financial plan appropriately, but in many cases the purchase of the annuity can be a horrible move. Many of my clients find out too late that the annuity they were sold ends up causing problems. If they need their money back soon after the purchase, they can end up paying surrender charges and can end up with a lot less money than they originally invested in the annuity.
A deferred annuity is an insurance product that receives special treatment under federal income tax law. The income generated by the annuity is only taxable when the funds are accessed. After death, the beneficiary of the deferred annuity receives the proceeds free of probate, so the annuity owner’s will has no effect on the annuity (unless the annuity has no beneficiary).
Sometimes from a pure income tax standpoint, buying an annuity is a mistake. I am seeing that some clients who barely have enough income to pay income tax are being sold deferred annuities. What then happens is the income is accumulated on a tax-deferred basis, then at death that income ends up going out to beneficiaries who are in a much higher income bracket. The proceeds are not being taxed at the older client’s lower income tax rate, and end up being on the tax return of beneficiaries at a higher tax bracket, so, overall, from a family standpoint, extra income taxes end up being paid on the annuity income. (In many cases, if the deceased client had made a different type of investment, it is possible that all of that income could have gone to the beneficiaries free of income tax.)
Often, on deferred annuities sold to elders, the annuity ends up being a blunder for MassHealth or Medicaid purposes. A deferred annuity is considered an available asset by MassHealth and is never a helpful investment in case of a long-term nursing home stay. Some of my clients who were sold deferred annuities believe they were told that the deferred annuity is not considered an asset if the client ended up in a nursing home and applied for MassHealth to pay for the nursing home costs. Unfortunately, a deferred annuity is considered just another asset in the MassHealth application process, and it has to be spent on nursing home care just like any other asset.
One of the biggest mistakes that many spouses make when the other spouse enters a nursing home is not getting legal advice from an elder law attorney about Medicaid, known in Massachusetts as “MassHealth.” The “free” information that many community spouses (which under MassHealth law means any spouse who is not in a nursing home) often rely on can turn out to be quite costly to them.
There are different layers in MassHealth law, and many persons only seem to know about the bottom layer, so let’s go over that one first. Under 2013 law, just about everything other than the home and car are totaled, and the community spouse supposedly can keep only the first $115,920. (The rest of the assets are effectively owned by the spouse in the nursing home, and supposedly have to be spent on the nursing home bills of the institutionalized spouse; but note that I intentionally wrote the word “supposedly.”) Unfortunately, this lower layer is where the knowledge of many persons ends, and two other upper layers of the law effectively override the lower layer. One upper layer is that the community spouse can enter into certain types of immediate annuity contracts with the spenddown (i.e., excess) assets.
Before even thinking about buying an annuity, the community spouse should keep three things in mind: (1) not every immediate annuity will work, where Massachusetts law makes most annuities assignable and the annuity has to be nonassignable under federal Medicaid law and MassHealth regulations; (2) the published regulations and unpublished internal procedures and policies which now allow such a move can change with little advance notice, so it is often not advisable that an annuity be purchased until the institutionalized spouse’s nursing home stay has already begun; and most importantly (3) some community spouses can keep everything without needing an annuity, and are better off without an annuity, due to the other upper layer of MassHealth law that protects income for the community spouse.
At present, the community spouse has the absolute right to an income of at least 1,891 per month. (Further, if shelter expenses exceed 30% of this figure, or $567, or if a disabled child lives at home, the community spouse is often entitled to keep much more than $1,891 per month.) If the Social Security and pension payable in the name of the community spouse is less than the $1,891 figure, at the end of the MassHealth application process the community spouse is allowed to keep some or all of the institutionalized spouse’s income. Because the monthly payment from an immediate annuity is considered to be the community spouse’s income, buying an annuity before the basic numbers have been analyzed by an elder law attorney could prevent the community spouse from receiving income from the institutionalized spouse. (That means the annuity payments in some cases would be simply replacing income that the community spouse was already entitled to have, and the annuity ends up not benefiting the community spouse.)
If the needs of the community spouse are greater than $2,898 per month, a higher amount of income can sometimes be preserved for the community spouse via the fair hearing appeal process, where the need to keep the other assets has to be proved to maintain the financial ability to remain in the community. A common situation where need can be fairly easily proved is where the community spouse is living in an assisted living facility and needs to be there due to frailty, medical condition or other special needs. Once the need to be in assisted living is established, the appeal is primarily about numbers and prevailing CD and money market interest rates, so the community spouse need not go to the hearing, and the elder law attorney can often handle it alone.
Another option to retain greater income for the community spouse is a Probate Court procedure known as separate support. Since both spouses need legal representation in court, it is important that the institutionalized spouse have a durable power of attorney that allows the appointed person to hire a lawyer to represent the interests of the institutionalized spouse.
When spenddown and appeal options are determined by an elder law attorney as potentially unsuccessful, the community spouse can often purchase certain types of immediate annuities, which should always be the last resort due to the manner in which the institutionalized spouse’s income ca be allocated to the community spouse for MassHealth purposes.
A warning to the trusting and the gullible: There are elder law “attorneys” and MassHealth application services who profit from selling annuities, so it is important to have the entire picture reviewed, and often to get a second opinion, before rushing into purchasing an immediate annuity from somebody who claims to be helping you; they may instead be helping themselves (to a healthy commission).
A final note : Maintaining the maximum retroactivity of the original MassHealth application is vital to preserve assets for the community spouse and to ensure that the nursing home will be paid by MassHealth, so the MassHealth fair hearing appeal process should never be overlooked if any type of notice of denial is ever received along the way. A community spouse can be (and has been) successfully sued by the nursing home if timely MassHealth benefits are not obtained; see Are You Personally Responsible for Your Spouse’s Nursing Home Bills in Massachusetts?
Obtaining Free Banking Information for MassHealth Applications
When applying for MassHealth long-term care benefits to pay for nursing home care in Massachusetts, it can be expensive to obtain copies of up to 5 years of banking information. Under Massachusetts General Laws, Chapter 118E, Section 23A , banks are required to provide this information free of charge if the information has been requested by a representative of MassHealth. In order to comply with this law, the Executive Office of Health and Human Services of the Commonwealth of Massachusetts has prepared pre-signed letters that can be completed by or on behalf of the MassHealth applicant. There are four versions of the letter, and the one to be used would be based on which office that the MassHealth application has been filed with.
If the application is filed in the Taunton office, use this form: http://www.mass.gov/eohhs/docs/masshealth/appforms/fir-1-taunton.pdf
If the application is filed in the Chelsea office, use this form: http://www.mass.gov/eohhs/docs/masshealth/appforms/fir-1-chelsea.pdf
If the application is filed in the Tewksbury office, use this form: http://www.mass.gov/eohhs/docs/masshealth/appforms/fir-1-tewksbury.pdf
If the application is filed in the Springfield office, use this form: http://www.mass.gov/eohhs/docs/masshealth/appforms/fir-1-springfield.pdf
It appears to be a requirement of these letters that a MassHealth application be already filed. In that situation, time is usually very limited to comply with MassHealth’s written requests for verifications of banking transactions. Since you wouldn’t know whether the bank had complied with the request unless you received the bank records yourself, it is probably not a good move to request that the records be sent directly to the MassHealth Enrollment Center.
