Variable annuity, trusts, Medicaid

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
Seasonal
Posts: 666
Joined: Sun May 21, 2017 1:49 pm

Variable annuity, trusts, Medicaid

Post by Seasonal » Mon Sep 30, 2019 10:02 am

A spouse owns a non-qualified variable annuity listing the non-owner spouse as a beneficiary (and their children as secondary beneficiaries). The owner's will leaves everything to the spouse in trust. On the second to die, the children would inherit.

If I understand correctly:

Upon the death of the owner, the spouse will receive the VA under the beneficiary designation and it will count as an asset for determining Medicaid eligibility. The spouse would be able to keep the VA as is or withdraw money as she saw fit. On her death, the VA would go to their children, who would have to withdraw the balance within five years, paying taxes on any gain above basis (capital appreciation and reinvested dividends, which would be withdrawn before principle).

Alternatively, the owner could remove the beneficiary designations and the VA would go into the trust for the spouse's benefit upon his death. The trust would have to withdraw the money within five years, as above.

It seems that the decision on what to do with the beneficiary designation would be a trade-off between the utility of Medicaid and the taxes that would be paid sooner if the VA went into the trust.

The couple are not currently paying taxes, so they could start withdrawing from the VA at a lower tax bracket than if the funds had to be withdrawn in five years. They are in their mid to upper 90s and live in NY.

I realize some are against methods to put assets into trust in order to qualify for Medicaid, so no need to mention that.

The VA is invested in a bond fund and the unrealized gain is a few hundred thousand dollars. I would appreciate hearing if the foregoing is correct and any thoughts on making the decision.

NotWhoYouThink
Posts: 2815
Joined: Fri Dec 26, 2014 4:19 pm

Re: Variable annuity, trusts, Medicaid

Post by NotWhoYouThink » Tue Oct 01, 2019 8:31 am

Leaving the VA to the spouse in trust won't remove it from Medicaid consideration.

Topic Author
Seasonal
Posts: 666
Joined: Sun May 21, 2017 1:49 pm

Re: Variable annuity, trusts, Medicaid

Post by Seasonal » Tue Oct 01, 2019 8:51 am

NotWhoYouThink wrote:
Tue Oct 01, 2019 8:31 am
Leaving the VA to the spouse in trust won't remove it from Medicaid consideration.
I was under the impression that assets in an irrevocable trust for the benefit of a person, when that person does not control the disposition of the trusts assets, does not count as that person's assets for purposes of determining Medicaid eligibility. Isn't that the entire idea of using a trust for asset protection and Medicaid eligibility?

Is trust income attributed to the beneficiary? I had thought only amounts distributed to the beneficiary count as Medicaid income. Of course, if the trust doesn't distribute all income to the beneficiary, the excess will be taxed at trust rates, which are rather high.

bsteiner
Posts: 4532
Joined: Sat Oct 20, 2012 9:39 pm
Location: NYC/NJ/FL

Re: Variable annuity, trusts, Medicaid

Post by bsteiner » Tue Oct 01, 2019 6:54 pm

There's usually no good solution to an investment-type annuity. If you (or your beneficiary) cash it in all at once, it may bunch the income. If you keep it, you'll continue to incur the expenses of the annuity (often 2.5% or 3% a year), and you'll continue to convert the future income and gains to ordinary income. Often the least bad choice is to cash it in over a few years. A beneficiary often has the option to take it over five years.

From a Medicaid standpoint, if the spouse doesn't claim the elective share (1/3 of the estate, including most nonprobate assets, in New York), he/she is deemed to have made a transfer of the elective share amount.

Topic Author
Seasonal
Posts: 666
Joined: Sun May 21, 2017 1:49 pm

Re: Variable annuity, trusts, Medicaid

Post by Seasonal » Wed Oct 02, 2019 3:49 am

bsteiner wrote:
Tue Oct 01, 2019 6:54 pm
There's usually no good solution to an investment-type annuity. If you (or your beneficiary) cash it in all at once, it may bunch the income. If you keep it, you'll continue to incur the expenses of the annuity (often 2.5% or 3% a year), and you'll continue to convert the future income and gains to ordinary income. Often the least bad choice is to cash it in over a few years. A beneficiary often has the option to take it over five years.
The VA is held at Vanguard (although they plan to transition administration), so costs are very low.

The VA holds a short-term bond fund, so future income and gains should not be very high. Accumulated income and gains are about 2/3 of the value of the VA.

The alternatives for the VA appear to be (1) leave her as beneficiary, in which case she'd have too many assets to qualify for Medicaid or (2) remove her as beneficiary, in which case at the owner's death it would go into her trust and the trust would have to withdraw everything within five years or (3) the owner could start cashing it (given his age, this would not accomplish much).

Under (1), she would not have to withdraw from the VA, but her heirs would have five years, most probably at a higher tax rate than hers.

In case (2), the trust would have ordinary income from the VA averaging something in the neighborhood of her anticipated annual expenses (distribution of principle from the VA would increase this) and perhaps well in excess. Would this be a problem for Medicaid qualification purposes?
bsteiner wrote:
Tue Oct 01, 2019 6:54 pm
From a Medicaid standpoint, if the spouse doesn't claim the elective share (1/3 of the estate, including most nonprobate assets, in New York), he/she is deemed to have made a transfer of the elective share amount.
Please explain the significance of this. Does it implicate the five year Medicaid look-back, in which case she would not qualify for Medicaid for a period of time from her spouse's death (because 1/3 of his assets exceeds the Medicaid asset limit)? If so, would that period be a number of months equal to 1/3 of assets divided by approximately $13,400?

Post Reply