1. Welcome! Thank you for joining today’s webinar.
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2. Strategies to Divest Non-DRA Compliant Annuities, Promissory Notes, and Other Assets
Presented By
Thomas R. Krause, J.D.
May 9, 2017
TheKrauseAgency.com | Enterprise Drive | De Pere, WI | (800)

3. Through specialized products, The Krause Agency helps insurance agents and financial advisors qualify their clients for government programs that pay for long-term care services provided in the home or at an assisted living facility or nursing home.

4. Goals of today’s webinar
To explore the proper structure of Medicaid compliant annuities and promissory notes as defined by the Deficit Reduction Act of 2005 (“DRA”).
To discuss divestment strategies for annuities and promissory notes that do not meet the requirements of the DRA.
To illustrate these strategies through simple case studies.

5. Seniors & Investments
Seniors are likely to have accumulated a number of assets throughout their lifetime.
This means you will regularly encounter clients that have traditional asset classes such as cash, CD’s, stocks, bonds, mutual funds, real estate, etc.
While the majority of the above assets are easily converted to cash and spent-down, what do you do when your client has an asset such as a preexisting annuity or promissory note?

6. Seniors & Annuities
With annuities being one of the most popular investment vehicles available, many of your clients will own old annuities. However, the majority of these annuities will likely cause eligibility issues when applying for Medicaid

7. What is a Medicaid Compliant Annuity (“MCA”)?
A properly structured immediate annuity with a commercial company that meets the requirements of the Deficit Reduction Act of 2005 (“DRA”)
MCAs are utilized as a spend-down tool to convert excess countable assets into an income stream
Very few companies offer such a product
Of the thousands of insurance companies offering SPIAs, only a handful have a contract that meets the requirements of the DRA.

8. MCA Requirements Irrevocable & Non-assignable Actuarially sound
The DRA outlines the requirements of a MCA. Generally speaking, a MCA must be:
Irrevocable & Non-assignable
Actuarially sound
Make equal payments, and
Name the State as beneficiary

9. DRA Requirement No. 1 DRA requires that an immediate annuity must:
(1) Be irrevocable and non-assignable

10. Must Be Irrevocable and Non-Assignable
Not able to be changed or reversed
Cannot alter ownership, annuitant, payee, beneficiaries, payment frequencies, payment amounts, or duration of payments.
Non-Assignable
Policyholder cannot assign ownership (i.e. the policy cannot be sold on the secondary market)

11. DRA Requirement No. 2 DRA requires that an immediate annuity must:
(1) Be irrevocable and non-assignable
(2) Provide for payments in equal amounts

12. Must Have Equal Payments
Provide for payments in equal amounts
Some states specifically require monthly, others just require them to be equal
No deferral
No balloon payments

13. DRA Requirement No. 3 DRA requires that an immediate annuity must:
(1) Be irrevocable and non-assignable
(2) Provide for payments in equal amounts with no deferral or balloon payments
(3) Be actuarially sound

14. Actuarially Sound
The policyholder must receive his or her investment back within his or her Medicaid life expectancy, as determined by that state's respective life expectancy table, or the life expectancy table published by the Chief Actuary of the Social Security Administration.
Ex. Mary an 84 year old widow residing in a MI nursing home has a Medicaid life expectancy of 7.26 years/87.12 months. For her annuity to be actuarially sound the term of the annuity must be less than or equal to 87 months.

15. DRA Requirement No. 4 DRA requires that an immediate annuity must:
(1) Be irrevocable and non-assignable
(2) Provide for payments in equal amounts with no deferral or balloon payments
(3) Be guaranteed to return at least the individual’s premium investment within the individual’s Medicaid life expectancy – actuarially sound
(4) Designate the state Medicaid agency as a remainder beneficiary

16. Medicaid Must be a Beneficiary
The State Medicaid agency must be named as the remainder beneficiary in the first position for at least the total amount of medical assistance paid on behalf of the institutionalized individual
Exceptions exist (i.e. community spouse, minor or disabled child, etc.)

17. What options do your clients have if their existing annuity is NOT Medicaid Compliant?

18. Available options usually consist of
Surrendering it
Transferring it
Selling it on the secondary market
Options will vary depending on the type of annuity and when it was purchased.

19. Two Basic Annuity Types
1. Tax-Deferred Annuity (“TDA”)
2. Single Premium Immediate Annuity (“SPIA”)

20. Tax-Deferred Annuity (“TDA”)
An investment at an insurance company that grows until the owner makes a withdrawal or annuitizes the contract
Types include: fixed, bonus, index, variable

21. Impact of TDAs on Medicaid Qualification
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 to the policy owner.

22. Surrendering TDAs Can be surrendered to an insurance company
Owner receives a cash commutation amount
If the product is terminated early, it will be subject to a surrender charge
Surrender charge (1%-15%) could be applied. Decreases annually – eventually reaching 0%

23. TDAs can be exchanged for another annuity – i.e. a MCA
Exchanging TDAs
An uninformed practitioner will attempt to liquidate long-standing TDAs, and inadvertently cause negative tax consequences.
What can you do instead?
TDAs can be exchanged for another annuity – i.e. a MCA
For a TDA with significant growth, the owner should consider a 1035 tax-free exchange

24. Immediate Annuities
An investment at an insurance company that immediately starts returning payments to the owner
Periodic payments can be for a specific term, a lifetime or a combination of both

25. Impact of Immediate Annuities on Medicaid Qualification
An immediate annuity may or may not be a “bad” annuity, depending on when it was purchased, pre- or post-DRA.

26. Treatment of Pre and Post-DRA Annuities
If the annuity was annuitized prior to the DRA, it should be treated as just an income stream.
If the annuity was purchased prior to the DRA, but annuitized after the DRA, the amount annuitized will be treated as an uncompensated transfer.
Basically, annuities purchased prior to the DRA will be treated as they are “supposed” to be treated – either a cash asset; or, if annuitized, an income stream.
This is all a generalization. Realistically, the treatment of an annuity purchased prior to the DRA is treated on a case-by-case basis.
Source: DEFICIT REDUCTION ACT OF 2005, PL 109–171, February 8, 2006, 120 Stat 4 Section 6012 (

27. Immediate Annuities Cannot Be Surrendered or Exchanged
No cash surrender value
Owner is only entitled to stream of payments
Because immediate annuities do not have any cash surrender value, they cannot be exchanged.

28. Selling an Immediate Annuity
An assignable, immediate annuity can be sold to a family member, or on the secondary market to companies such as J.G. Wentworth or Peachtree

29. Goals of the Valuation Process
Obtain 3rd Party annuity valuations from various top rated funding companies
Liquidate a non-DRA compliant annuity that would otherwise prevent client from being eligible for Medicaid benefits
Complete the transaction in an expedited manner to coincide with any Medicaid planning being done on behalf of client – timing is of the essence in Medicaid Crisis Planning

30. Valuation: The Basics
When a client transfers ownership of an annuity, they are trading a series of future payments for a single, upfront sum.
The basis of annuity valuations is the financial concept of the time value of money, or TVM.
TVM, assumes a dollar in the present is worth more than a dollar in the future because of variables such as inflation and interest rates. A dollar received today can be invested to return more than a dollar in the future.

31. Valuation Terms to Understand
Discount Rate — The interest rate funding companies use to compute the present value of future cash flows. Industry averages range from 8-25%.
The Discount rate typically correlates with the number of remaining payments or length of the guaranteed term remaining. (i.e. the longer remaining term, the higher the discount rate).
Present Value — The current worth of an amount to be received in the future. In the case of an annuity, present value is the current worth of a series of equal payments to be made in the future.

32. Option 1: Purchase the Annuity Intra-Family
Offers compiled by TKA will set the “fair-market value” for the annuity contract.
It is recommended that the family member(s) place a bid either matching or exceeding the highest offer.

33. Option 1: Advantage
Purchasing the annuity intra-family will provide the best economic result
Family benefits from the discount rate rather than a third party funding company
Family member(s) acquire the annuity for the current market rate. However, as the new owner(s), family member(s) are entitled to the entire amount remaining in the annuity.

34. Option 1: Potential Pitfalls
Must be family member(s) with available funds to purchase the annuity in its entirety
Issues obtaining funding
Potential for intra-family issues
Annuity transfer process can be difficult for inexperienced family members
Due to time sensitive nature of making a Medicaid application, mistakes requiring corrections could be costly
Medicaid may question the legitimacy of an intra-family transaction
May require fair hearing.

35. Option 2: Sell the Annuity on the Secondary Market
TKA works regularly with a number of highly regarded funding companies in the industry to ensure that the client obtains an optimal result.

36. Option 2: Advantages
Client receives top offers for the future payments
The timeliness of the transaction allows for expeditious Medicaid planning
Less likelihood of a fair hearing

37. Option 2: Potential Pitfalls$
Client will lose some value due to the discount rate.

38. Case Study: Meet Jane
Jane, 81, enters a nursing home that charges $6,500 per month. Jane has monthly
income from social security of $1,200.
IRA $100k
Checking Account $25k
Non-DRA compliant immediate annuity issued by New York Life Insurance Company with 72 remaining guaranteed monthly payments of $1, totaling $93,600.00
The contract contains a “life” option
Jane’s goal is to apply for Medicaid by end of the month

39. Annuity assessed and the following offers are obtained:
Step 1- Obtain Offers
Annuity assessed and the following offers are obtained:
Company
Offer Amount
Discount Rate
TKA
$70,400.00
9.88%
Funding Co. A
$69,134.72
10.54%
Funding Co. B
$68,215.20
11.04%
Funding Co. C
$66,325.43
12.09%

40. Step 2 – Accepted Offer Client accepts TKA offer of $70,400.00
The same day TKA sends one-page bill of sale, the insurance company transfer paperwork, and a release form authorizing TKA to work directly with the insurance company to complete the transfer
Once the bill of sale is signed and the transfer paperwork is complete, TKA begins the process of finalizing the transfer

41. Step 3 – Completion of Transfer
TKA receives the completed documents and submits the transfer paperwork to the insurance company
Once the insurance company confirms that all of the transfer paperwork is in order and the transfer is being processed, TKA releases the funds via wire transfer to Jane’s account

42. Valuation Timeline
The valuation process took a total of 3 weeks from initial contact to the time the client received the wired funds
This allowed Jane to make the Medicaid application the same month, which saved her an additional $5,300 by qualifying for Medicaid benefits immediately

43. Seniors & Promissory Notes
Seniors may have pre-existing promissory notes with family members or others to help ensure repayment of a loan.
Promissory notes must be properly structured to work as a Medicaid planning tool.

44. Promissory Note Requirements
The DRA requires that a promissory note* be: 1) actuarially sound; 2) provides for equal payments with no deferral or balloon payments; and 3) is not cancelled upon the death of the lender – i.e. self canceling.
*42 U.S.C.§1396p(c)(1)

45. Collateral Issue
Arguably, even a note that complies with the DRA still may be deemed an available resource for determining Medicaid eligibility.
If the note does not contain language that specifically states it is non-negotiable and/or non-assignable by the lender/payee, the assumption may be that it can be sold on the secondary market for value.
Thus, the note may be treated as an asset rather than just income.

46. What can be done with the Promissory note if it is treated as an asset?
Promissory notes will have value on the secondary market under certain circumstances.
If the promissory note is secured by property, it will have a strong value on the secondary market, similar to an annuity.
If the promissory note is not secured with property, it will likely have no or nominal value on the secondary market.

47. Case Study: Meet John and Elaine
John, 84, enters a nursing home charging
$7,000 per month. His wife, Elaine, 83, is
concerned about their finances and wants to
qualify John for Medicaid as soon as possible.
John and Elaine have $300k in cash assets
John and Elaine are the obligors of promissory note with their son whom they loaned money to purchase a property
The promissory note has 250 remaining monthly payments of $1,400
The note is secured with a first position lien on the property that is valued at $200k
Upon application, the Medicaid department treated the promissory note as an asset. In order to expedite Medicaid qualification, John and Elaine opt to sell their interest in the note on the secondary market

48. Annuity assessed and the following offers are obtained:
Step 1- Obtain Offers
Annuity assessed and the following offers are obtained:
Company
Offer Amount
Discount Rate
TKA
$100,000
16.21%
Funding Co. A
$95,325.00
17.11%
Funding Co. B
$90,321.43
18.16%
Funding Co. C
$89,645.35
18.31%

49. Step 2 – Accepted Offer Client accepts TKA offer of $100,000.00
The purchase agreement was signed
Interest in the property was secured by recording interest in the deed of trust.

50. Step 3 – Completion of Transfer
The funds were wired the same day the recording was confirmed.
This allowed John and Elaine to spend-down the $100,000.
Upon reapplication, the Medicaid department acknowledged that their interest in the note was sold for fair market value and thus no penalty period was imposed.

51. Valuation Timeline
The valuation process took a total of 2 weeks from initial contact to the time the client received the wired funds.
This allowed John and Elaine to make the Medicaid application the same month, which saved them an additional $6,500 a month by qualifying for Medicaid benefits immediately.

52. Questions ? ? ? ? ?

53. Thank you for attending our session!
Next webinar May 23rd Medicaid Planning for the Couple P
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