Ohio Protects Seniors from Stranger-Originated Life Insurance

The Ohio legislature has given final approval to a landmark bill that will help assure the integrity of the life insurance market and protect seniors from a growing abuse called stranger-originated life insurance (STOLI).

In a STOLI transaction, investors such as hedge funds finance a program that induces senior citizens to obtain insurance for the sole purpose of transferring the death benefits to the investors. The investors hope to profit when the seniors die, and the sooner they die, the higher the profit. Seniors caught up in these schemes can face unexpected taxes, loss of insurance capacity, loss of privacy, potential legal liability and may even render themselves ineligible to participate in government entitlement programs.

The legislation, H.B. 404, targets STOLI by reducing the economic incentive for abusive transactions and giving life insurance companies better tools to detect and deter STOLI deals before they occur.

More Retirees Retain Mortgage Debt

Mortgages Carried Later In Life a Disturbing Trend

By Tim Grant, Pittsburgh Post-Gazette

Owning a home free and clear has been an enduring part of the American dream, but in recent years more people are waking to the reality that they will be retiring still owing money on their mortgages.

“It's a bad trend,” said P.J. DiNuzzo, president of DiNuzzo Investment Advisors in Beaver. “One piece of advice I can give is to pay off your house and then retire.”

Rather than cutting back on debt, people approaching retirement appear to be increasing the amount of debt backed by their primary residence, a complete shift from what retirees in past generations did. The number of families headed by people 55 or older with housing debt has increased steadily from 24 percent in 1992 to 36 percent in 2004, according to the Employee Benefit Research Institute in Washington, D.C.

Income Annuities for Retirement Financial Security

Wharton Study Suggests Lifetime Income Annuities Best Asset Class for Retirement Financial Security

Reprinted from Businesswire.com. August 08, 2007 09:49 Dueling Asset Classes: Wharton Study Demonstrates That Lifetime Income Annuities Are Best Asset Class for Financial Security in Retirement

NEW YORK--(BUSINESS WIRE)--As Americans grapple with the challenge of potentially outliving their retirement savings, a new study, co-sponsored by the Wharton Financial Institutions Center at the University of Pennsylvania and New York Life Insurance Company, identifies lifetime income annuities as the most cost-effective and least risky asset class for generating guaranteed retirement income for life.

The Wharton academic study revealed that:

•Income annuities can provide secure income for one’s entire lifetime for 25-40% less money than it would cost an individual to provide a similar level of secure lifetime income through traditional means, thanks to an insurer’s ability to spread risk across large numbers of people;

Bailing out of Unwanted Annuities

Rising Market in Purchase of Long Term Annuities

A fast-rising secondary market for people looking to cash in annuities for a lump sum settlement is causing consumers concern. Is this the perfect escape hatch for people locked into an annuity they don't want or yet another way for brokers to take advantage of seniors in dire financial straits? Of course, as with all financial tools, there is the possibility for both in each situation.

With an annuity, the buyer pays an insurance company a sum in return for regular payouts over a defined period. With more and more people owning or inheriting annuities, you can bet more and more people find themselves in a situation where they want out. Most annuities charge "surrender" penalties of up to 20% if the owner wants to withdraw the principal before a set period has expired. The penalty generally decreases with time.

Ohio Expands Medicaid Resource Recovery

When the Medicaid estate recovery program was instituted in Ohio in 1995, only the assets in a deceased person's probate estate were subject to recovery. Ohio adopted an "augmented estate" approach to recouping Medicaid expenditures effective July 1, 2005. This approach expands the class of assets available for Medicaid estate recovery.

The law, codified in Ohio Revised Code 5162.21, applies to Ohio Medicaid recipients who died on or after September 20, 2005. For those individuals, the so-called "augmented estate" includes all real and personal property in the probate estate; any real or personal property that would have been part of the decedent's probate estate but for release of administration procedures; AND any other real or personal property in which the deceased had an interest or to which they had legal title immediately prior to death (to the extent of such interest).

The new law changed dramatically the way Ohio property law works.  Prior to the law, title of property sometimes vests automatically at the time of death to a beneficiary or heir.  Generally, once title vests in the ownership of another, the debts and liabilities of the former owner are not enforceable against the property, and the new owner can be assured that the title is free, clear, and unencumbered. The new law provides that title vesting to another is irrelevant, at least when the State of Ohio is the creditor; Ohio may pursue its claims against property after the death of the Medicaid recipient even if Ohio filed no lien, claim, mortgage, or encumbrance prior to the recipient's death.   

Consider the following example: John Smith, Medicaid recipient, owns a home, an annuity, a bank account jointly with his daughter, and a living trust that holds various investments. This example is only to show how estate recovery works with different assets, and is not a realistic depiction of a Medicaid recipient; most Medicaid recipients have no assets. Smith transfers an interest in the home to his adult daughter, and they become joint tenants with right of survivorship. Prior to the establishment of the augmented estate, the home and the joint bank account would have passed automatically to Smith's daughter on his death, and would never have been part of the probate estate. Therefore, they would not have been subject to estate recovery. 

The assets in the living trust don't "transfer", per se, but they are not administered through probate. Smith's successor trustee would distribute the trust assets to the named beneficiaries in the trust, free from resource recovery.  Similarly the annuity pays beneficiaries, outside of probate, free from resource recovery. 

Under the new law, because Smith had a legal interest in all of those assets in the moment before his death, all of the assets are included in his augmented estate for the purposes of Medicaid estate recovery, and are recoverable by the State of Ohio.

Prior to the new law, individuals could preserve assets for  their family simply by removing them from their probate estate. Under the new law, preserving assets is harder. 

The state can only attempt to recover against the estate of a Medicaid recipient after the death of their surviving spouse (if married), and when the Medicaid recipient no longer has any surviving children who are either under the age of 21 or are blind or totally disabled. (Total disability is defined by Medicaid regulations.) However, if you do not have a surviving spouse or children with qualifying disabilities, your adult children or other heirs might find assets they expected to receive claimed instead by Medicaid estate recovery.

If you are concerned about preserving assets for your family in the event that you need Medicaid assistance at some point in your life, you will need to plan to keep assets out of your augmented estate. Certain transfers are permissible to keep assets out of an augmented estate, as are other estate planning tools like supplemental needs trusts for disabled or special needs beneficiaries, and certain irrevocable trusts.  An elderlaw lawyer can help map out strategies to meet your goals and needs.