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Seniors need to be aware of a critical fact in dealing with banks, which many people tend to overlook: banks are interested in selling you financial products on which they earn substantial profits from commissions, sales charges and penalty fees.  Some banks employ aggressive sales practices that are inappropriately directed at the elderly.  Even when bankers are honestly trying to make a helpful suggestion regarding your savings and investments, many of them simply don’t have a complete understanding of what is in your best interest, particularly when Medicaid planning is or will be in the picture.

One of the financially lucrative products for banks is the commercial annuity. Typically, here’s an example of how they sell it to you, and what subsequently happens when you begin planning for Medicaid eligibility…

A financial adviser at the bank notices you have $100,000 in a money market account.  You receive a phone call informing you that instead of earning a paltry 0.25% interest, you could be getting 3%!  And all you have to do is simply agree to transfer your money into an annuity. Unfortunately, if you accept this advice without considering its implications, you will lock up your funds for an extended period of years, and you will not be able to withdraw your money without substantial penalties, which can include losing part of your principal.

For Elder Law planning purposes, these annuities can be very problematic.  You can only qualify for Medicaid if the total amount of your assets is below a certain limit (currently $13,800).   In order to satisfy Medicaid’s eligibility standard, yet still retain the benefit of some or all of your money and investments, you will likely need to transfer your assets to others or into one or more trusts.   Additional planning techniques affecting your assets may be involved as well.  However, Medicaid planning can be financially painful when your money is locked up in a commercial annuity.

Of course, were you to raise a concern about access to your money with the salesperson at the bank, you might hear something like, “This annuity allows you to withdraw up to 10% of your principal each year without penalty.”   But the reality is that being able to take out 10% still won’t do you any good, when the other 90% is trapped in the annuity for years to come, unless you are prepared to pay substantial penalties to gain access to your own money.

Banks continue to aggressively sell these products to elderly customers, which the Medicaid lawyers at Lamson & Cutner have been noticing with more frequency.  In fact, one of our clients recently mentioned that his mother was receiving calls from her bank every week, with the representative pushing a commercial annuity product.

Of course, we don’t mean to suggest that these annuities are bad investments for everyone, or that all annuities are bad.   A commercial annuity that offers a good rate of return might be a prudent investment for a younger person who is not likely to need access to the principal amount invested in the annuity for several years.

There are also other kinds of annuities that might be more appropriate for an elderly person.   For example, a retired person who is concerned about running out of money might consider purchasing a single premium immediate annuity, which guarantees a monthly income for the rest of his or her life.  If a need to apply for Medicaid should arise later on, the annuity will not count against Medicaid’s financial eligibility standard, because the person has no access to the principal amount invested in the annuity.

Of course, for Medicaid applicants who live in the community, the monthly income generated by the annuity, together with Social Security and other income, may cause the individual to have “surplus income” above the amount allowed by Medicaid.  If this problem should arise, there is an easy and effective solution: the Pooled Income Trust.  For Medicaid applicants who reside in a nursing home, the monthly income must be paid to the nursing home.

You can learn about the Pooled Income Trust (and other Trusts) in Lamson & Cutner’s Special Report. Click here to see the 25 Strategies to Prevent Financial Ruin from Long-term Health Care Costs Special Report.
Lamson & Cutner welcomes your comments, questions, and feedback regarding The Elder Law Exchange newsletter.  Please feel free to contact us anytime at help@elderlawexchange.com.

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