Setting up ownership correctly as well as beneficiary designations is important.Let’s say a husband and wife co-own an annuity and they put the wife down as the annuitant on the application.They unknowingly make their son the primary beneficiary. She passes away and surprise to them, the annuitant’s death starts in motion what is called a “trigger event”. This “trigger event” passes the money to the next in line who is the primary beneficiary, which in this case is the son, thus by-passing the living spouse…the husband.
The couple just gave the money to their son which is a taxable event. This is also a problem regarding Medicaid eligibility for the father. What if dad now needs care within the next 5 years and cannot self pay?He may need Medicaid to pick up most of his long-term care expenses. The problem is, under the Medicaid rules, they created a period of ineligibility since the gift was made within the five year look-back period. Naturally, if the son returns the money then problem solved regarding Medicaid but he will give back less if they had gain in the contract because he had to pay taxes on the gain. The son may give the money back but the IRS isn’t going to.
What if the daughter in-law has plans for the new found windfall and thinks that her mother in-law did not make a miscalculation but instead “meant for them to have the money?”What if she doesn’t want to give it back? This mistake may be a very costly error.
This could have been proactively nipped in the bud by making sure the annuity application was done correctly.Some insurance companies trigger distribution from the death of the annuitant and some from the death of the owner.Having the correct ownership and beneficiary designation in place can not only save taxes, keep control over the owner’s money, but can also help guard against pitfalls when Medicaid planning. Check and make sure your savings, investments, and beneficiary designations are structured correctly.Correct structure can save you time, heartache, and money.