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Court issues major pro-Medicaid annuity ruling

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Any reasonable person who has worked in the Medicaid planning field knows that there is no rule restricting when a penalty-free transfer can take place. Even the thought is preposterous, but that did not stop Ohio from trying to use that rule to deny people their rights created under federal law to properly transfer assets into a Medicaid compliant annuity.

Add another one to the win column for Medicaid compliant annuities. Occasionally, in the area of long-term-care Medicaid, the states like to overreach. I could give countless examples.

States agree to run Medicaid in a way that is “no more restrictive” than the federal laws governing Medicaid. Even still, they try to go beyond their federal mandate to add little restrictions that they just hope everyone will follow without question. The average Medicaid applicant has neither the time, nor the patience, nor the resources to force the state to comply with their federal mandate.

The federal law — especially after implementation of the Deficit Reduction Act (DRA) — is very specific about what kind of annuity counts as an income or an asset, and when they create a transfer penalty. The federal law puts no restriction on when a Medicaid compliant annuity can be purchased. Quite often, Medicaid compliant annuities are purchased in crisis planning cases to convert excess assets into an income stream for the community spouse. This helps the community spouse to keep from going broke and to provide resources for the community spouse’s own care and wellbeing later on down the road. This is most commonly done after the snapshot date — a date based upon when the patient entered the hospital or the nursing home, used to determine the total amount that must be spent down.

While not completely specified, the ability to transfer funds into these Medicaid compliant single premium immediate annuities (SPIAs) are clearly assumed to be allowable after the patient enters the nursing home. Why is that clear? Because the DRA requires the state to be named as a beneficiary (primary or behind certain other eligible beneficiaries) of the annuity.

While the state must be named, its claim is limited up to the amount of care paid on behalf of the institutionalized spouse — something that I put right in the beneficiary declaration on the annuity application. In short, it’s not always possible to tell which spouse will be institutionalized until crisis strikes.

Additionally, creating a Medicaid SPIA sooner in the one-half deduction states can actually penalize the community spouse. In the majority of states that use the snapshot date to determine the community spouse resource allowance (CSRA), the CSRA is based on the value of countable assets on the snapshot date. If a patient has $300,000 on the snapshot date, their CSRA would max out at $115,920 (the 2013 limit). They could then convert $185,000 into a Medicaid qualified SPIA to complete the spend down.

However, if they did the same Medicaid qualified SPIA before the snapshot date, their available resources on the snapshot date would be $115,000. Since the CSRA is based on one-half of that amount, they would have to spend down an additional $57,500 before becoming Medicaid eligible, leaving the community spouse with half of the allowance she or he should have had.

In Ohio, the state Medicaid department tried to put an end to the use of Medicaid compliant annuities in crisis asset conversion cases. The state added a small requirement: If the annuity was purchased after someone had gone into the nursing home, it was treated as a transfer for less than fair market value and disallowed. Any reasonable person who has worked in the Medicaid planning field knows that there is no rule restricting when a penalty-free transfer can take place. Even the thought is preposterous, but that did not stop Ohio from trying to use that rule to deny people their rights created under federal law to properly transfer assets into a Medicaid compliant annuity.

Fighting these things can be difficult. Even when you have the law and the facts on your side, the judicial process can go haywire on you. That’s what originally happened in Ohio. What should have been an easy slam dunk for the federal district court in favor of the Medicaid applicant became a nightmare for Medicaid planners in the region.

The district court actually upheld the state’s practice of disallowing the Medicaid compliant annuities. When that happens, the effect only applies to the geographic region that the district court covers. In this case, it was essentially the northern half of Ohio. While we were still having great success using annuities in southern Ohio, planners in the north mostly stopped and waited to see where this case went.

For those readers who did not take civil procedure in law school, a federal district court’s opinion is appealed first to the circuit court. A circuit covers a number of states, and when a circuit court rules on something, it is binding in those states. Taking a case to the circuit court is a large gamble. If you win, you set precedent for a whole region of the country. If you lose, you take a bad decision in one part of one state and expand it to all the states in the circuit. In the 6th Circuit, that could have spelled trouble for everyone in Michigan, Ohio, Kentucky and Tennessee — and potentially set a bad precedent for other states.

Fortunately, the gamble paid off. The 6th Circuit Court issued a well-drafted opinion which struck down the state’s view on Medicaid compliant annuities and affirmed the common planning technique used by Medicaid planners throughout the country. (See: Hughes, et al. v. McCarthy, 6th Circuit Court of Appeals, No. 12-3765, October 25, 2013.)

The effect of this ruling cannot be understated. It is uncertain if the state will appeal or if the Supreme Court would even hear the appeal. That said, this case marks one of the highest rulings in favor of Medicaid compliant annuity planning. It gives judicial support to the common asset conversion techniques used by Medicaid planners and a full-throated opinion in favor of the proper use of Medicaid compliant annuities in crisis planning cases.

Asset conversion is essential for the ability to take retirement assets and turn them into something akin to a pension plan for the healthy spouse. Without the ability to do that, Congress recognized that it would be a huge disincentive for people to save their resources for retirement. If Congress had wanted to put a limit on when the conversion could take place, they would have done so specifically. It is reprehensible for a state to add on a limit, but they often get away with this because not enough people stand up and challenge it.

Remember, when a state gets more restrictive they violate a patient’s rights; if we let that happen, everybody loses. And by everybody, I’m referring to the struggling community spouses who often far outlive their spouses in the nursing home. They need to rely on the asset conversion to make sure they have enough income to survive. They often have not planned ahead and need to react to a severe long-term-care crisis that threatens them with financial ruin and threatens to deplete their entire life’s savings. The strategic use of the Medicaid compliant annuity allows for Medicaid planners and knowledgeable annuity producers to provide meaningful help to these retirees; and now the 6th Circuit Court has given them a strong vote of support.

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