Client receiving father's annuity as a gift

My client asked this question, and I'd like to double-check what implication would receiving their father's annuity as a gift would have. Is my understanding correct that the rights to receive the payments would just transfer to my client (the child) and they'd step in the shoes of their father - the 1099-R would be issued to them and the taxable amount would be calculated in just the same way as it would for their father?

"Our father has Parkinson's and moved into a nursing home in August. We are about to engage an elder law attorney to help us on asset protection so that he can qualify for MediCal to help with the nursing home fees. One thing the lawyer mentioned was gifting $ to my brother and I, divided equally, at a rate of $10,000/day until our parents' assets fall below the required minimum, which is 130K. They own approx 1.5 million in stock, 300K in cash, and 25K in an annuity that matures in 2024. I'm not sure how to think about the annuity."

Please comment on the annuity treatment or anything to watch out for.

Thank you for your input,
MK

Consider discount planning via gifting to more rapidly deplete assets. I expect a short-term GRAT would be quite helpful.

If all they do is what the client's attorney proposed, is my understanding correct regarding annuity treatment?

Medi-Cal and Medicaid is there to help folks who have no resources to help themselves. The legislature has recognized the strategy to gift away assets so as to become indigent and qualify for benefits, and in response established a look-back period. When that period has passed, then he might qualify.

There's workarounds the legislature didn't think about.

Why should you and the rest of society pay the expenses for a person that is capable of paying them himself?

Hi, mariaku,

You are correct about the 1099-R. It seems to me that you should (i) make sure there is a durable power of attorney, and (ii) leverage the gifting via aggressive discounting with the goal of achieving eligibility sooner.

Hi, Frankly,

Good political question, but not one for a planner. We burn the government for a living.

Isn't OP asking what the tax consequences are of transferring an annuity that is owned by a qualified plan of Dad to a child of Dad, while Dad is alive? If that's the scenario, isn't that a distribution to Dad from the qualified plan, followed by a gift from Dad to child of Dad? Won't sec 72(e)(4)(C) cause immediate taxation to Dad?

I was under the impression that the annuity was acquired by Dad outside of any retirement plan. Rights to a retirement plan benefit are not transferable by the plan beneficiary.

I had the other impression. Let's hear from OP.

This falls into the realm of personal, vs tax, but I experienced this for my Mom. One thing I bring up with my clients is to consider the institutions that provide Medicaid beds. Those are typically not the "top of the line" facility. At the more desirable facilities, even if they have Medicaid beds, they may be few and far between. It became a question of just where did I want to put my Mom?

Seems like the Dad who has saved all his life might not appreciate the choices his kids/attorney are making for him.

The look-back period for Medicaid in most of the country is 60 months, but in California is 30 months.

OP: the annuity is outside of any retirement plan. The entire planning is done by an "elder-law attorney", I was just asked for tax implications. The child is my client, not the father.

OK, so it's a non-qualified annuity, and your client is the child. If the cash surrender value of the annuity exceeds the investment in the contract (i.e., the investment has increased in value), that increase gets immediately includedin Dad's income and also increases child's tax basis in the annuity.

What does dad say? I hope your client is planning on paying dad's expenses so he doesn't end up in a dreary facility, even if good ole dad gifts him all his assets. Joan hit it on the head. If my client came to me & asked that question, we would have a literal Come to Jesus meeting about how he was going to make sure dad's assets w/be used to make dad's life VERY comfortable until he was no longer with us.

"So he can qualify for MediCal? Seriously?"

Be real. Sonny-boy, with the help of Loop-hole Larry, wants to get his grubby hands on dad's money, and dump him in a nursing home paid for by the rest of society. I don't help facilitate such schemes, "legal" or not. Dad can pay his own way.

Do you also advise your highly profitable S corp. owners to take a truly justifiable high salary so as to help fund SS and Medicare?

Whether it is morally right or wrong is beside the point. The last sentence of post #9 is worth considering.

Re #11: That doesn't sound right to me. Is there some special rule re annuities that triggers gain on gift? To me it's just a simple transfer and the child steps in the father's shoes.

But if there is a desire to qualify for government benefits, then the transfer should be considered in the context of solving that problem.

72(e)(4)(C).

Thanks. Learned something...

You could, I suppose calculate annuity value using the 7520 tables. Easier to ask company. Essentially a gift of present interest.

I suspect that triggering the tax will be worth it. It will eventually become OI anyway, so from an economic perspective we're only talking about the interest on the tax. And the tax today reduces his net worth.

With aggressive discount concepts you can transfer, say, 75% of his net worth in two years and only show a minimal gift to the Medicaid analysts.