1 VA Planning case studies VA Planning with a Level Annuity VA Planning with a Balloon Annuity Dale M. Krause, J.D., LL.M Enterprise Drive De Pere, WI phone facsimile medicaidannuity.com Krause Financial Services a limited liability company in the State of Wisconsin. Dale M. Krause, and Krause Financial Services, LLC, by means of this flyer, is not offering legal advice. With respect to the material contained in this flyer, some of the material may be affected by current and future changes in law. For those reasons, the accuracy and completeness of such information, and the opinions of its author, are not guaranteed. In addition, because of the complexity and interrelationship of various areas of law which are presented in this flyer, from which there may be certain exceptions or limitations, the strategies and plans outlined in this flyer may not be suited for every individual, in every state. As such, it is strongly suggested that before employing any one or more, of the techniques, strategies, expositions of any law, the reader should secure the services of a competent elder law attorney in his or her respective state. Furthermore, no inference is to be drawn that any of the insurance products provided by Krause Financial Services have been reviewed or approved by any state Medicaid office. Krause Financial Services makes no guarantee that purchase of any insurance products will result in eligibility for Medicaid or any other assistance program.
2 Case Study: VA Planning with a Level Annuity The goal is to obtain eligibility for the Veterans Aid and Attendance monthly pension benefit while providing the claimant with sufficient income and resources to maintain his or her lifestyle and continue residing in an assisted living facility. Meet Marshall Marshall is a 79-year-old veteran living in the Midwest. His Parkinson s disease has restricted his movements making it impossible for him to adequately bathe, dress, or drive himself. Marshall moves to an assisted living facility. Marshall soon realizes he needs assistance to meet his monthly expenses in order to remain at the facility indefinitely. Medical Expenses $3, Assisted Living Facility $3,550 Medicare Part B $ Recurring Prescriptions $ Other Expenses $ Cable Television $71.94 Cell Phone $76.60 Incidentals $ Step One: Determine the IVAP Marshall s monthly income consists of $1,200 from social security and pension. With this amount being reduced by his total monthly unreimbursed medical expenses of $3, Marshall has a monthly income shortfall of $2, This is the maximum amount of monthly income that can be created while maintaining eligibility for the full maximum annual pension rate - IVAP. $1,200 Income $3, Medical Expenses ($2,667.76) IVAP Step Two: Determine the Spend-Down Amount Presently, Marshall has total countable resources of $132,500. Marshall s attorney instructs him to retain $30,000 of cash assets. With the $30,000 being deducted from the total countable resources Marshall has a VA spend-down of $102,500.
3 Step Three: Generate Additional Income With Marshall being 79 years of age his Medicaid 1 life expectancy is 8.63 years/ months. To generate the additional income Marshall purchases a single premium immediate annuity ( SPIA ), to-wit: Period Certain Investment Monthly Payout Total Payout 83 Months 2 $102,500 $1, $104, Economic Results 3 After completing the aforementioned plan, Marshall s monthly cash flow increases to $2, This amount is well below his monthly UMEs of $3,867.76, resulting in an IVAP of $1, As a result of the negative IVAP Marshall is entitled to the maximum available pension benefit of $1,788. With the monthly pension benefit taken into consideration, Marshall s total monthly cash flow is $4,249.06, which amount is identical to his total monthly out-of-pocket expenses - medical and otherwise. What Happens if Marshall Needs More Skilled Care? Assume Marshall enters a nursing home in month 24 and wanted to immediately qualify for Medicaid benefits. Marshall has two options available: (1) sell his annuity or (2) flip the switch and make it compliant with DRA. (1) Marshall can sell the annuity to a family member and create an added wealth transfer. In the event a family member is not able to purchase the annuity it can be sold on the secondary market. Utilizing the proceeds of the annuity sale and what s remaining of the $30,000 of countable resources he had previously retained, Marshall can then proceed with a half-a-loaf plan. (2) Marshall uses a Medicaid Compliant Annuity to reduce his savings account to an amount less than $2,000. He then designates the state Medicaid agency as a beneficiary of his current annuity, and instructs the insurance company to make it irrevocable and non-assignable. A Medicaid application is made thereafter, with Marshall s co-pay equaling his social security and Medicaid Compliant Annuity income, less his personal needs allowance. 1 Even though we are conducting VA planning at this point in Marshall s life, and abiding by the Medicaid life expectancy is not a requirement, Krause Financial Services suggests never structuring a SPIA so that it exceeds a Medicaid life expectancy to ensure a smooth merge onto Medicaid in the future. 2 Rather then extending the term to match Marshall s full Medicaid life expectancy, this term was utilized to generate the needed income level for Marshall to meet his care costs. 3 Even though the VA will reduce the unreimbursed monthly medical expense amount by 5% of the base pension amount it does not change the economic result of this case study.
4 Case Study: VA Planning with a Balloon Annuity The goal is to obtain eligibility for the Veterans Aid and Attendance monthly pension benefit while providing the claimant with sufficient income and resources to maintain his or her lifestyle and continue residing in an assisted living facility. The use of a balloonstyle annuity is most common in instances where a small income level is needed, or in an instance of a claimant owning a large IRA. Meet Clarence Clarence, a veteran, is 88 years of age and lives in the Midwest. Clarence s wife passed several years ago, and he was finding it difficult to adequately bathe, dress, and drive himself. In order to meet all his activities of daily living, and avoid being a burden to his family, Clarence moves into an assisted living facility. After seeing the high costs associated to his care, Clarence realizes he will only be able to stay at the facility for a short time, and is in need of assistance. Medical Expenses $4,077 Assisted Living Facility $3,800 Medicare Part B $ Recurring Prescriptions $ Other Expenses $ Cable Television $71.94 Cell Phone $76.60 Incidentals $ Step One: Determine the IVAP Clarence s monthly income consists of $1,200 from social security and pension. With this amount being reduced by his total monthly unreimbursed medical expenses of $4,077 Clarence has a monthly income shortfall of $2,877. This is the maximum amount of monthly income that can be created while maintaining eligibility for the full maximum annual pension rate - IVAP. $1,200 Income $4,077 Medical Expenses ($2,877) IVAP Step Two: Determine the Spend-Down Amount Presently, Clarence has total countable resources of $200,000, with $30,000 in a checking account and $170,000 in an IRA. Clarence s attorney instructs him to retain $30,000 of cash assets. With the $30,000 being deducted from the total countable resources Clarence has a VA spend-down of $170,000.
5 Step Three: Generate Additional Income With Clarence being 88 years of age his Medicaid life expectancy is 4.64 years/55.68 months. To generate the minimal monthly income that Marshall requires, he purchases two tax-qualified SPIAs using the funds from his IRA - one balloon-style SPIA and one level-pay SPIA, to-wit: Period Monthly Balloon Certain Investment Payout 4 Payment Total Payout 55 Months $76, $1, N/A $77, $93, $56.25 $92, $95, Total: $170, $1, $92, $173, Upon maturity the balloon payment will be made to the owner - Clarence. At any time during the period certain Clarence may elect to convert the balloon-style SPIA to a level-pay SPIA; this is a one-time, irreversible election. Clarence may be interested in doing so should he need additional income, or should he need to redistribute the final balloon payment to maintain program eligibility. Economic Results 5 After completing the aforementioned plan, Clarence s monthly cash flow increases to $2, This amount is well below his monthly UMEs of $4,077, resulting in an IVAP of $1, As a result of the negative IVAP Marshall is entitled to the maximum available pension benefit of $1,788. With the monthly pension benefit taken into consideration, Clarence s total monthly cash flow is $4,458.30, which amount is identical to his total monthly out-of-pocket expenses - medical and otherwise. What Happens if Clarence Needs to apply for Medicaid? DRA gave preferential treatment to annuities consisting of tax-qualified funds - they generally do not need to provide equal monthly payments. Meaning, Clarence s balloon-style SPIA will be readily accepted by the Medicaid office, after the state Medicaid agency is made a beneficiary. 6 With no uncompensated transfers made, Clarence will be immediately eligible for Medicaid benefits. Any funds remaining in the annuity upon Clarence s death, after the state Medicaid agency is repaid, will be provided to Clarence s intended heirs. With his monthly annuity payments contributed towards his cost of care, the Medicaid claim will be minimal, thus creating a greater wealth transfer. 4 With Clarence having an annual required minimum distribution of $13,385.83, his monthly required minimum distribution is $1, The combined payouts of the aforementioned SPIAs will meet Clarence s required minimum distribution set forth by the Internal Revenue Service. 5 Even though the VA will reduce the unreimbursed monthly medical expense amount by 5% of the base pension amount it does not change the economic result of this case study. 6 Depending on the state, this step may not be required.