What if Your Client comes to you with a "Bad" Annuity?

Oct. 3, 2012 - PRLog -- With annuities being one of the most popular investment vehicles available, it shouldn't be a surprise when a client drops off a mountain of financial documentation and you happen to find an annuity policy or two.  Whether the annuity is acceptable for Medicaid planning purposes will first depend on (1) the type of annuity it is and (2) when it was purchased.

A tax-deferred annuity is almost always a "bad" annuity for Medicaid planning purposes.  The investment can usually be accessed at any time, making it a countable resource.  An immediate annuity may or may not be a "bad" annuity, depending on when it was purchased - pre or post DRA.

So where does that leave your client? The available options usually consist of surrendering it, completing a 1035 exchange, or selling it on the secondary market.
Surrendering an Annuity

A tax-deferred annuity can be surrendered, wherein the owner receives a cash settlement amount in exchange for a surrender charge.  Any gain on the policy is subject to income taxes.  An immediate annuity cannot be surrendered.
The 1035 Exchange

A tax-deferred annuity can be exchanged for another type of annuity tax-free, as long as certain qualifications are met regarding ownership.  The surrender charge may still apply in this option, but the policyholder will not be subjected to income tax on the gain of the policy.  An immediate annuity cannot be exchanged.
The Secondary Market

The secondary market is the primary option for immediate annuities.  Companies exist that will purchase annuities for a discounted value.  They provide the policyholder with a lump sum of cash in exchange for all future payments of the policy.

Options will always vary depending on the type of policy and the insurance company the policy was purchased from.  The above is simply a general synopsis.  If your client has an annuity you think might be "bad," don't hesitate to send a copy to my office.  We commonly review "bad" annuities policies, and make recommendations as to what actions may be needed in order to make it a "good" annuity - a Medicaid Compliant Annuity.