Written by: Dale Krause, J.D., LL.M

First, what makes an annuity “immediate”

For an annuity to be “immediate,” it must be annuitized.  Once annuitized, the product no longer has cash surrender value, unlike tax-deferred annuities which always have cash value.  For clients looking to qualify immediately for Medicaid benefits, the distinction is critical.  Cash value is a countable resource, while a Deficit Reduction Act of 2005 (DRA) compliant annuitized annuity is only a future income stream.

Parties to an Immediate Annuity

Now that you understand the types of annuities – tax-deferred or annuitized, the next thing you need to know are the parties to an immediate annuity and how their positions impact the product.  Generally, immediate annuities have six parties, to wit:

Issuer: This party is an insurance company.

Owner: This party purchased the annuity and controlled its disposition.

Annuitant: This party is the measuring life for lifetime payouts and the product’s death benefits.

Payee: This party receives the payments during the annuitants’ lifetime.

Primary Beneficiary: At the death of the annuitant and assuming the primary beneficiary survives, this party receives the payments remaining in the annuity.

Contingent Beneficiary: At the death of the annuity and assuming the primary beneficiary did not survive the annuitant, this party receives the remaining payments.

When an immediate annuity involves non-qualified funds (post-tax funds)

When an immediate annuity involves non-qualified funds (post-tax), the community spouse is typically the owner, annuitant, and payee.  At the community spouse’s death, the State Medicaid Program (SMP) is the primary beneficiary to the extent of Medicaid benefits received by the institutionalized spouse.  If SMP recovers what it paid on behalf of the institutionalized spouse, the community spouse’s children, as contingent beneficiary, receive the remaining payments.

When an immediate annuity involves qualified funds (pre-tax funds)

When the immediate annuity involves qualified funds (pre-tax) owned by the institutionalized spouse, the institutionalized spouse is the owner, annuitant, and payee.  At the institutionalized spouse’s death, the community spouse is the primary beneficiary to the extent of the remaining payments.

If the community spouse does not survive the term of the remaining payments, the community spouse has the right to direct their disposition. Note: at the institutionalized spouse’s death, some insurance companies allow the community spouse to cash-out the remaining pre-tax payments; since the funds are pre-tax, the community spouse can invest the cash payment into his or her IRA account.

Notwithstanding the above, if an institutionalized spouse wants to take advantage of the “name on the check rule” strategy, instead of naming himself or herself as owner, annuitant, and payee, he or she would substitute the community spouse as payee.  The annuity is still Medicaid compliant – irrevocable, non-assignable, actuarially sound, equal payments, and correctly names beneficiaries, but benefits the community spouse with the monthly payments rather than the institutionalized spouse.