Retirement planning can be confusing. Not only is it complex, but the rules can change quickly, particularly in times of financial tumult and upheaval. If you choose to use an annuity as part of your retirement planning, be aware that the dispersal of the annuity upon your death may be directed to Medicaid. If you want it to go somewhere else, you need to consider those plans carefully before you purchase your annuity.
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- exercise habits, and
- any existing medical challenges
By staying on top of health issues that can get expensive, you can both enjoy your retired time and protect your assets so they can be directed in the direction you choose.
What Will You Leave for Your Family?
If you plan to give your family any portion of your estate in the future, be aware that many states have a claw back. For example, if you know that you may not be able to remain in your home, you may plan to transfer the deed of your home to your children so they have the asset in their name in the event of your death or infirmity.
At the time of your death, your home may be at risk. You can transfer your home to
- your surviving spouse, and/or
- a disabled child
However, the third beneficiary must be Medicaid. In addition to your home reverting to this fund, your annuity remainder may also be at risk. You cannot be denied these funds benefits because you own a home or have an annuity or 401(k) account. You must review your options to protect your assets from claw back at the time of your death.
Annuities: An Asset Protection Option
It is possible to purchase a Medicaid-friendly annuity. These are primarily put in place to protect the remaining savings of an elderly couple if they need to go into a skilled nursing facility.
Skilled nursing care is extremely expensive; few retirees can afford it for long. A Medicaid-friendly annuity can protect some assets. However, a Medicaid-friendly annuity is irrevocable. Once in place, you cannot change it, and penalties for early withdrawal can be punitive.
That being said, these vehicles can work, depending on the laws of the state, and here’s how. If a couple has $100,000 in savings and one of them is forced into skilled nursing care, the spouse still at home can keep half the money. The spouse in care can keep a set amount of cash (let’s say $2,000), but the rest must be spent down for care.
This “spending down” can be prevented with the purchase of a Medicaid-friendly annuity. The spouse in care buys the annuity from an insurance broker with the dollars they would have had to spend down. The annuity benefits are paid to the spouse outside of care. This spouse also gets to keep their half of the joint savings.
Before, this couple had $100,000 to share. Now,
- in-care spouse: $2,000
- out-of-care spouse: $50,000
- out-of-care spouse: monthly annuity benefit from the $48,000 annuity purchase
There are a few things to consider in this situation.
1) The claw back is a state restriction and the rules can change at any time.
2) Your annuity purchase may not be grandfathered in. New rules, new restrictions.
3) An irrevocable annuity is just that: irrevocable and unchangeable. If either spouse should die unexpectedly, having funds trapped in an annuity can be challenging.
Protecting the Most Vulnerable from Catastrophic Expenses
This program serves those who are most medically vulnerable. Access to this program can be the difference between dignity and destitution. That being said, it’s very expensive to run and often supports the very sickest and elderly members of our society.
States are always working to keep their budgets in check, and the claw back is one method of keeping the books balanced. Maintaining access to this program for the general population is critical, but be prepared that, if you do need to access it, your assets will be vulnerable in one way or another.
Your Golden Years
You can protect the assets you’ve built up over your lifetime and disperse them as you choose, but it will take careful planning. Years before you retire, dig into the data available on your state’s claw back risks. In addition to working with your accountant, set up a meeting with a financial planner to get your assets in order.
Also consider setting up a meeting with an elder law attorney. Not only can this professional help you to set up vehicles to protect and direct your assets, but they can help you keep an eye on law and regulation changes that will keep you in compliance.
Having Enough to Live On
At the end of the day, managing your investments is about guaranteeing yourself an income. Outliving your money is a valid fear. To best protect yourself and your loved ones,
- consider going from full-time to part-time
- put that extra time to use by boosting your physical fitness and expanding your social circle
- make sure you have a life outside of work before you leave work
While your winding down your working years, make sure that you pay down debts, such as your home and car. Know exactly what you need for basic living each month before you get that last paycheck.
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