Elder Law Attorneys are frequently faced with a myriad of issues surrounding annuities and many times find it difficult to provide adequate answers for their clients.
Questions:
1) What should be done with older annuity contracts in which companies are offering financial incentives to policy holders to relinquish the guaranteed income and death benefits?
2) Should the Family Trust be designated as the beneficiary of an annuity?
3) Are annuities viable investments for Medi-Cal and Veteran’s benefit planning?
Answers:
1) Insurance companies are tempting investors to accept cash bailouts on older annuities that provided returns of 5% to 6% no matter the status of the stock market. Transamerica and Hartford are offering lump sum payments to policy holders to avoid the guaranteed payouts of these deferred variable annuities purchased in the late 1990s and early 2000s. AXA Equitable is making an offer of a $25,000 addition to policy holders to avoid paying the death benefit which has increased by 50% in some cases. If obtaining a higher income is more important than the increase in the death benefit to heirs, this may be appropriate. However, for policy holders with the Hartford and Transamerica annuities who expect to live another 15 years or more, you should think twice about these offers. You will be losing these guaranteed lifetime payouts which have accumulated over the years for a reduced one-time payment. These annual returns are impossible to find in this low interest rate market and the insurers are using the cash payment as a lure in this tough market climate. Hold on to that annuity.
2) Rarely is it beneficial to designate the Family Trust as the beneficiary of an annuity. If there is a minor or disabled beneficiary who will benefit from the annuity, a Trustee will be preferred to a Court guardianship or conservatorship. Absent these type of beneficiaries, I feel that individuals, rather than a Trust should be designated as beneficiaries. The key to this decision lies in the annuity contractual death options for beneficiaries section. Normally, there are less positive options for payouts if a Trust is designated as the beneficiary. READ YOUR CONTRACT. If you don’t like what you read, make the appropriate beneficiary change.
3) This is a very significant issue in Medi-Cal and VA planning. Yes, I recommend annuities and have used them very successfully in Medi-Cal planning. But you should not purchase an annuity, willy-nilly, without serious planning in this regard. Medi-Cal has very restrictive regulations in the use of annuities which can cause ineligibility if certain requirements are not met.
One of the greatest mistakes I have seen is financial advisors advising clients to obtain irrevocable annuity contracts for VA planning which cannot satisfy the Medi-Cal eligibility requirements. You must obtain advice from knowledgeable attorneys and financial advisors in this regard. There is a new annuity product which provides eligibility for both VA pensions and Medi- Cal. Under our new law, the Deficit Reduction Act, DEFRA, the state of California must be made the annuity remainder beneficiary under certain circumstances. Not so, with VA planning. So, how can the annuity be of benefit for Medi-Cal purposes if the state is designated as the beneficiary? We will have to leave that issue to a subsequent article on the new DEFRA law.