During my years in the industry, it has become clear to me that very few advisors know anything about giving compliant Medicaid advice to senior clients, the largest segment of clients financial planners and insurance advisors work with.
Because Medicaid compliant annuities are an integral tool in many Medicaid plans, I asked attorney K. Gabriel Heiser, JD, one of the true experts in Medicaid planning, to put together a summary of a few cases that have made their way through the legal system. The following three cases support the use of Medicaid compliant annuities. Contrary to what you may have heard from others, Medicaid planning and Medicaid compliant annuities are alive and well, even after the Deficit Reduction Act.
Three recent cases support Medicaid annuity use
A number of recent cases involve state Medicaid departments either counting Medicaid annuities as available assets or treating their purchase as a penalty-causing transfer of assets. However, the vast majority of the cases have been decided in favor of the Medicaid applicant, finding that the states simply are not following the clear language of the federal statutes. Here are three recent cases that follow this trend.
The case of Lopes v. Starkowski, No. 3:lO-CV-307 (JCH) (D. Conn. 8/11/2010)
This U.S. District Court (Conn.) case approved the purchase of a Medicaid annuity by a community spouse. In this case, Mr. Lopes, age 85, was in a nursing home; he had $1,600 in assets. Mrs. Lopes had $340,000. Rather than spend down a good portion of her assets, she purchased a Medicaid annuity with a premium of $166,220. This reduced Mrs. Lopes’ assets enough for Mr. Lopes to qualify for Medicaid.
First, the state wanted evidence that the annuity was non-assignable. If it can be assigned, sold or transferred, it can have value aside from its annuity value and thus would
become a countable asset. The insurance company that sold the annuity provided such a letter. However, then the state DHS attempted to argue that the income stream itself could be sold, even if the underlying annuity could not be. They actually found a buyer willing to purchase Mrs. Lopes’ right to the annuity payments. Since Mrs. Lopes refused to sell her income stream in this way, the state rejected the Medicaid application.
The court held that, while Mrs. Lopes might be capable of selling her rights to the income, she would be violating the terms of the annuity contract if she did so; and such a breach of her legal obligation to the insurance company makes her ability to assign the income stream not an asset.
In addition, the court held that treating even an assignable income stream as an asset is inconsistent with federal law, quoting the federal statute that states that “no income of the community spouse shall be deemed available to the institutionalized spouse.” The court indicated that the DHS interpretation would open the door to states recharacterizing other income sources as assets, such as Social Security; and it simply conflicts with the very carefully laid-out statutes allowing and approving Medicaid annuities. Finally, the court cites the Medicaid annuity statutes as indicating “Congress’s generally permissive attitude toward carefully constructed annuities.”
The case of Vieth v. Ohio Dept. of Job & Family Services (Ohio Ct. App., 10th Dist., No.08AP-635, July 30, 2009)
Mr. Vieth entered a nursing home when he and his wife had $300,000 of countable assets. In order to reduce their countable assets, Mrs. Vieth purchased two annuities, one for $127,000 and one for $14,000. The state Medicaid department agreed they met all the requirements of the Ohio code (i.e., they were “Medicaid-compliant” annuities). But when Mr. Vieth applied for Medicaid shortly thereafter, the state turned him down for having made an “improper transfer of assets,” namely the purchase of the two annuities in the name of the community spouse.
The state acknowledged that the Deficit Reduction Act (DRA) changed the law with regard to annuities to provide that, in certain circumstances, the purchase of annuities will not
be treated as an improper transfer. The department maintained, however, that the DRA did not change how the CSRA is calculated or how spousal resources are
treated for Medicaid eligibility purposes; and the department contended it was proper to deny appellant Medicaid vendor payments where the funds transferred
to purchase the annuities were in excess of the CSRA.
The court carefully reviewed a number of recent annuity cases, including the James v. Richman case discussed above, and found that there is no support for the state’s position. The fact that the funds in excess of the CSRA would be used to purchase an annuity that would increase the community spouse’s income was irrelevant. What mattered was that the annuity met all the requirements under the federal DRA law, i.e., it was irrevocable, non-assignable, actuarially sound based on the life expectancy of the annuitant, provides for payments in equal amounts during the term of the annuity with no deferral and no balloon payments made; and it named the state as remainder beneficiary after the surviving spouse (if any). Since the Ohio Medicaid department’s interpretation of the annuity rules is inconsistent with federal law, it will not be followed.
The case of James v. Richman (547 F.3d 214 (3 Cir. 2008))
This case concerned Mr. and Mrs. James. Mr. James was in a Pennsylvania nursing home and applied for a “resource assessment,” which is the step where the state Medicaid department determines how much of a couple’s assets may be protected, and how much must be spent down before the nursing home spouse can qualify for Medicaid. In order to reduce their assets, Mrs. James purchased a $250,000 single premium immediate irrevocable annuity. The annuity was payable to Mrs. James over an eight-year period in monthly amounts of approximately $3,000. The annuity contract stated that the contract “may not be surrendered, transferred, collaterally assigned, or returned for a return of the premium paid. This contract is irrevocable and has no cash surrender value. An owner may not amend this contract or change any designation under this contract.”
After purchasing a new car with the balance of the couple’s excess assets, Mr. James applied for Medicaid and was rejected because of the “availability of the $250,000
annuity.” The reason cited was that any amount of a couple’s assets in excess of the CSRA may not be converted into income for the community spouse through
the purchase of Medicaid annuities for the sole benefit of the community spouse.
In its defense, the state Medicaid department offered the declaration of a Michael Goodman, Chief Executive Officer of J.G. Wentworth, a finance company specializing in the
purchase of annuities, as evidence of the value and marketability of the annuity, despite the non-assignment language in the annuity's endorsement.
In its decision, the court, relying on language in the SSI Program Operations Manual System (POMS), held that, because Mrs. James lacked the legal power to liquidate the annuity, it is not an available resource. They stated, “Even if ...[Mrs.] James has the de facto ability to effect a change in ownership of the annuity, she cannot do so without breaching the contract and incurring legal liability. Accordingly, the annuity cannot be treated as an available resource.”
The state, however, argued that even if Mrs. James could not transfer or cash in the annuity itself, she could nonetheless assign her rights to the annuity payments, i.e.,
the income stream from the annuity. The court, however, was not convinced, stating that “[t]here is no statutory basis for such a theory and, indeed, adopting it would tend to undermine the MCCA rule that “no income of the community spouse shall be deemed available to the institutionalized spouse.”
Finally, the court noted that it doesn’t matter what the court thinks is the purpose of the Medicaid rules; its job is merely to implement Congress’s purpose as expressed in the statutes.