Deferred Annuities As A Planning Tool

by Mark A. Krohn, Esq., Partner
Jacobowitz & Gubits, LLP

Deferred annuities can serve as a very useful tool.
Deferred annuities can assist in Medicaid planning by reducing the Community Spouse’s Resources (without penalty) to a level below the Community Spouse Resource Allowance ($95,100 in 2005) thus qualifying a spouse going into a nursing home for Medicaid. Also, deferred annuities can serve as an alternative for individuals whose incentive to contribute to traditional IRA accounts have been weakened by Tax Reform. The advantage that deferred annuities have over traditional or Roth IRA accounts is that there is no limit to the amount of money you can invest annually in an annuity, whereas maximum amount one can contribute to a Roth Ira and traditional IRA for 2006 is $4000.

Where Do I Buy An Annuity?
You buy an annuity from an insurance company and pay a lump sum or a series of payments in return for a guarantee by the insurance company that the funds will grow at a certain rate, tax free. Thereafter, at a future date you receive regular income payments for life.

What Determines How Much I Receive?
The amount of each payment will depend upon the amount you contribute to your annuity, the length of time the funds are left to accrue, and the interest rate earned on the funds. Various options enable you to structure payments so that they continue after your death for the benefit of your spouse or your children, or for a minimum term of years regardless of who actually receives them.

What Are Some of The Advantages of Deferred Annuities?
The advantages of deferred annuities is the guaranteed tax-free return on your funds since the income is not taxed until you begin withdrawing the money. As a consequence, your funds accumulate more quickly than they would if they were taxed. Further, the regular monthly income payments for the remainder of your life takes the worry and risk out of budgeting for your retirement income. If you should die before payments begin, your heirs will receive the full amount of your original principal.

Are There Different Kinds of Deferred Annuities?
Yes. There are two(2) types of deferred annuity: fixed and variable. With a fixed annuity, the insurance company guarantees that your funds will grow at a specified rate for a period of time. Most companies guarantee a specific rate of return for at least the first year. Thereafter, the rate will fluctuate at least once a year consistent with the then-prevailing interest rates. In the case of a variable annuity, your rate of return is determined by the performance of investments you select from mutual funds offered by the insurance company. You have the choice of putting all your money into one fund or many funds. You can usually earn a larger return than with a fixed annuity. However, if your investment choices perform poorly, you original principal may be eroded.

Are There Costs Associated With Deferred Annuities?
Most companies charge an annual management fee of between one-half (.5) percent to one and one-half (1.5%) percent of total assets. If you invest in a variable annuity you will also pay a percentage of your total assets to cover management costs for the mutual fund.

How Does a Deferred Annuity Help With Qualifying Your Spouse for Medicaid?
When one spouse lives at home while another spouse is going to move into a long-term care facility where Medicaid may be a factor, a deferred annuity can be used to reduce excess resources while at the same time producing a stream of income from which only a fraction may be available as a Medicaid resource. For example, excess resources are invested in an annuity contract in exchange for an income stream thus reducing the resources of the spouse living at home which otherwise would be subject to Medicaid reimbursement. In the event the income stream of the community spouse is greater than the minimum monthly maintenance allowance ($2,378 in 2005) only 25% of the excess income is deemed available to Medicaid for purposes of reimbursement.

Overall, deferred annuities offer flexibility to your retirement planning and elder law planning and are not subject to the same restrictions that traditional and Roth IRAs are subject to.

Many insurance companies offer a broad portfolio of mutual fund investment options which allow you to create an annuity portfolio suitable to your needs. As always, you should consult with Estate or Tax attorneys who can assist you with your decision to include a deferred annuity as part of your estate and asset planning.