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Medicaid Planning with Annuities
Introduction
The Medicaid penalty for transferring assets is a period of ineligibility and is imposed only for the uncompensated value of a transfer. Therefore, if assets
are transferred to a third party, but full value is received in exchange for the assets, there is a transfer for value and no Medicaid period of ineligibility is imposed.
Purchase Annuity
The Deficit Reduction Act creates two situations in which the purchase of an annuity is exempt from the Medicaid transfer of assets penalties.
Annuity Purchased by Retirement Account
An annuity purchased by a single person is exempt if the annuity is:
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an annuity described in I.R.C. §408(b) or (q); or
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purchased with proceeds from an account or trust described in I.R.C. §408(a), (c), (p); or
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a simplified employee pension as described in I.R.C. §408(k) or a Roth IRA as described in §408A; or
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actuarially sound.
Annuity Requirements
The annuity is:
- Irrevocable;
- Non-assignable;
- Actuarially sound as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration; and
- Payments are made in equal amounts during the term of the annuity with no deferral and no balloon payments.
The best strategy is for the community spouse to purchase an annuity for the benefit of the community spouse prior to the institutionalized spouse entering the
nursing home. The community spouse becomes the owner of the annuity and is the annuitant. The annuity must be an immediate annuity and it must be irrevocable and nonassignable. It is then
considered a noncountable asset not subject to the Medicaid transfer rules.
However, single-premium deferred annuities are not suitable as a Medicaid planning device, because they can be surrendered. Therefore, they are “available”
assets. The solution to the single premium deferred annuity dilemma is to convert it to an immediate annuity.
There is no limit on the amount of income that a community spouse can have. A term certain can be purchased as a part of the annuity. However, the term certain
cannot exceed the life expectancy of the annuitant.
There appears to be no reason why a single individual could not purchase an annuity. This would be a good strategy, if the actuarial life expectancy of the
individual was considerably longer than the actual life expectancy. However, some states use actual life expectancy rather than actuarial life expectancy; this requirement reduces the value of
this strategy. One advantage is that Medicaid estate recovery would be based on the lower Medicaid reimbursement rate, which is lower than the actual cost of a nursing home.
In those states where a retirement plan is considered a countable asset, annuities are a particularly good planning technique to protect the retirement plan
assets of the community spouse. Not only are the assets protected, but because the annuity is owned by the retirement plan there is no income tax due until the payments are made from the
annuity to the annuitant.
Another strategy is to annuitize existing annuities. The existing annuity must be amended so that it is irrevocable and nonassignable. Even a pre-DRA annuity
annuitized after the DRA is subject to all of the requirements of the DRA.
There are five disadvantages to converting resources to annuities:
- Loss of liquidity;
- Vulnerability to inflation;
- Vulnerability to interest rate risk;
- Exposure to insurance company failure; and
- Reduction or elimination of MMMNA. If the community spouse purchases an annuity, the annuity payment constitutes income, which would reduce the
MMMNA. It also may preclude the expansion of the CSRA; however, the annuity might be a good strategy when the community spouse already has income in excess of the MMMNA.
Some states, including New Jersey and Pennsylvania, maintain that an annuity owned by a community spouse is a countable asset. If the annuity combined with
other assets forming the Community Spouse Resource Allowance exceed the maximum CSRA, the institutionalized spouse is not eligible for Medicaid. Josephine A. James is 76 years of age and is
married to Robert A. James, a 78-year old resident of a Pennsylvania nursing home. At the time of Robert’s admission to the nursing home, the James’ countable resources totaled $381,443.
After subtracting Josephine’s CSRA, the available resources totaled $278,343. Josephine purchased an annuity in the amount of $250,000, paying her $2,937.71 per month. The contract was
irrevocable and non-assignable and actuarially sound. Robert’s Medicaid application was denied, because the State Medicaid Agency contended that the annuity had a value of $185,000 in the
secondary market and offered a letter from J.G. Wentworth to this effect. The United State District Court for the Middle District of Pennsylvania held that under HCFA Transmittal No. 64
§§3258.9b and 3258.11b there is no transfer of asset penalty for the purchase of an annuity that is irrevocable and actuarially sound and purchased for the sole benefit of the community
spouse. Further, relying on Mertz v. Houstoun a commercial annuity that is actuarially sound and irrevocable is not a countable asset. The James court held that “a holding that the market
value of an income stream derived from an irrevocable actuarially sound annuity is a countable resources would effecting contravene the MCCA, which provides that no income to the community
spouse shall be deemed available to the institutionalized spouse. 42 U.S.C. §1396r-5(b)(1).”
In a letter to Meredith G. VanPelt, Deputy Attorney General of the State of New Jersey, dated October 20, 2003, CMS took a contrary position. CMS stated that
if an annuity can be sold, the basic rules concerning treatment of resources require that the fair market value of the annuity be countable as a resource in determining eligibility.
Countable Resource
In a somewhat bizarre case, a non-assignable annuity was held to be available for Medicaid purposes because of its value in the factors market. The community
spouse purchased an annuity that was non-assignable for $150,000 providing for payments of $2,855.91 for 60 months. The Medicaid Agency determined that while the annuity was non-assignable,
the secondary “factors” marketplace would offer something for the spouse's right to receive payments. Because the community spouse did not offer the annuity for sale in the factors marketplace
for at least 75% of its fair market value, she could not show that she had made a good faith effort to sell this stream of income. A North Dakota Supreme Court affirmed the agency's finding.
North Dakota has a history of cases resulting in extremely harsh results for Medicaid applicants.
The Wisconsin Department of Health and Family Services has changed its policy on annuities. Effective March 1, 2004, it counts annuities as available assets
unless the individual can prove that the annuity payments cannot be sold at a fair market price on the open market. This is similar to the “factor” test used by North Dakota.
The New Jersey Supreme Court has reached the opposite conclusion. The primary issue was whether an annuity is a countable asset in determining eligibility. The
state Medicaid Agency contended that there is a secondary market for annuities; thereby rendering them available assets. The state also contended that its regulations limit the resources a
couple may invest in an annuity to the amount of assets that may be retained for use by the community spouse under the CSRA. The court held that the key criteria under HCFA Transmittal 64 is
that the annuity be actuarially sound. The court also relied on a letter from Thomas Hamilton to Robert J. Richardson dated October 21, 2002, that does not permit a limitation under which an
annuity may be purchased for the benefit of the community spouse only to the maximum CSRA.
The state relied on an October 20, 2003, letter from Glen Stanton, Acting Director of the Disabled and Elderly Health Care Programs Group, in which Mr. Stanton said, “If an annuity can be
sold, the basic rules concerning treatment of resources require that the fair market value of an annuity that can be sold is countable as a resource in determining eligibility.” The court
noted that in the North Dakota case the “community spouse, as the annuitant, had the right to change the payee at any time.” The court concluded that deference should be given to Transmittal
64 and the Hamilton letter and that the limitation imposed by New Jersey is contrary to federal law. The court further stated that it gave no deference to the Stanton letter, because it relied
on information furnished by DMAHS rather than an independent analysis of the factual and legal basis or the proposition that annuities may be sold. The court stated that an irrevocable and
non-assignable annuity purchased for the benefit of the community spouse cannot be considered a countable resource and that the state failed to establish that an annuitant may sell a
commercial annuity, despite its contract terms. “The availability of a secondary market for commercial, irrevocable and non-assignable annuities, is not supported by the facts or law.”
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