The Use of Annuities for Final Years Planning

Deferred Annuities Provide Tax Advantages and Potentially Better Earnings

The appeal of deferred annuities is the deferral of taxes on earnings until money is withdrawn or the annuity is converted into a guaranteed income stream. Deferred annuities can also avoid probate if the owner chooses not to create a living trust for this purpose. As a general rule, annuities have the potential of producing an average yearly rate of return somewhat better than a bank CD or savings account. Annuity returns also tend to be more stable than short-term savings.

Medicaid Annuities

If one spouse in a couple needs long term care costs to be covered by Medicaid, the couple must divide combined assets in half and the spouse needing care must spend his or her half of the assets down to less than $2,000 remaining. This loss of assets may reduce the standard of living for the healthy spouse at home.

Medicaid will allow the spouse needing care to convert his or her share of the assets into an income annuity that belongs to the healthy spouse. This legal strategy provides the healthy spouse with more income and avoids the impoverishment imposed by the spend down. These annuities must meet strict rules imposed by Medicaid and an expert in this area should be sought out.

In the past, advisers also recommended these income annuities for single Medicaid beneficiaries in order to transfer some of the spend down assets to members of the family at the death of the annuitant. The Deficit Reduction Act of 2006 changed the rules for these single Medicaid beneficiary annuities and did away with their use as a planning tool for asset transfers. Under certain circumstances partial transfers can still be done using a Medicaid beneficiary income annuity called a "half-a-loaf" transfer. As with a spouse annuity, an expert should be sought in order to make sure this is done properly.

Medicaid Anticipation Deferred Annuity

Money can be invested in deferred annuities anticipating the eventual annuitization (conversion into guaranteed income) for Medicaid purposes. Many practitioners set up these investments inside of living trusts which also avoid probate. These deferred annuities should be designed so that the money can be turned into a guaranteed income stream for either spouse of a couple. The income stream must go to the healthy spouse -- the one not requiring Medicaid assistance.

Charitable Annuity Remainder Trusts

Many people have investment property that has accrued a significant capital gains tax liability in the event of a sale. Some people prefer to give their assets to charity and a charitable remainder trust is a way to transfer property with capital gains liability to a charity and avoid the taxes. These arrangements also include a lifetime income option for the individual or couple making the donation. The charity provides the income and, in many cases, will use a single premium income annuity to create the monthly cash flow. In the case where a person receiving this income anticipates needing Medicaid or the VA benefit in the future, the income must be set up as an irrevocable annuity and the charity must be the owner and not allow the annuitant any control over the income.