A question for my insurance/broker Junkies....

[griswold]

So, I have a client who's mother just had a stroke and has to go into a nursing home.

She has no long-term care policies and obviously can't get one now anyways.

However, she has a significant amount of fixed annuities. The family wants to use that money to pay for her care, but they were thinking because it was for long-term care that they could withdraw it tax-free.

My research has shown that it appears that the money has to be in an annuity with a long-term care "feature" in order to use it tax-free for her care.

Is this correct?

Are any of you aware of this "product"?

Thanks in advance...Gris

[revo]

according to our in-house Insurance head, the money from annuities will not be tax-free, even if used for LTC. Annuities work on a LIFO structure, so gains are taken first (and taxed) and then the tax-free principal is taken. Even if used for a nursing home, the IRS will not know which money was used and which wasn't, so there's no way around it.

As of last year, you can now use annuity proceeds to pay for LTC insurance tax free, but not for the facility itself. And as you said, there are LTC annuities as well.

Unfortunately, the family is out of luck.

[griswold]

according to our in-house Insurance head, the money from annuities will not be tax-free, even if used for LTC. Annuities work on a LIFO structure, so gains are taken first (and taxed) and then the tax-free principal is taken. Even if used for a nursing home, the IRS will not know which money was used and which wasn't, so there's no way around it.

As of last year, you can now use annuity proceeds to pay for LTC insurance tax free, but not for the facility itself. And as you said, there are LTC annuities as well.

Unfortunately, the family is out of luck.

Thanks Revo....I was hoping that you'd chime in.

So, then what is a LTC annuity if you can't use it tax-free for long-term care?

[revo]

Thanks Revo....I was hoping that you'd chime in.

So, then what is a LTC annuity if you can't use it tax-free for long-term care?

An annuity designed to pay for LTC is tax-free....the problem here is the annuities your client's mom have are not designed to pay for LTC -- thus the IRS will designate it as taxable, according to our Insurance guy (who's also a lawyer). I would contact the insurance company though to see if you can do a 1035 exchange into an annuity that could pay for LTC tax-free, though.

Also, if that fails, any medical bills that are greater than 7.5% of AGI would be deductible, and LTC qualifies for that. So your client would be able to whack out any income (SS, Investment, etc.) and get a bigger deduction.

[griswold]

An annuity designed to pay for LTC is tax-free....the problem here is the annuities your client's mom have are not designed to pay for LTC -- thus the IRS will designate it as taxable, according to our Insurance guy (who's also a lawyer). I would contact the insurance company though to see if you can do a 1035 exchange into an annuity that could pay for LTC tax-free, though.

Also, if that fails, any medical bills that are greater than 7.5% of AGI would be deductible, and LTC qualifies for that. So your client would be able to whack out any income (SS, Investment, etc.) and get a bigger deduction.

Thanks Revo...that was my thought as well. Do a 1035 swap from the current fixed annuity into an LTC annuity and then she could tax the money out tax-free.

Yeah, I knew about the 7.5% medical scenario as well.....I wanted to get someone like you to confirm the 1035 idea into a LTC annuity.

Thanks, my friend!

[revo]

Thanks Revo...that was my thought as well. Do a 1035 swap from the current fixed annuity into an LTC annuity and then she could tax the money out tax-free.

Yeah, I knew about the 7.5% medical scenario as well.....I wanted to get someone like you to confirm the 1035 idea into a LTC annuity.

Thanks, my friend!

No problem. Good luck!