Medicaid compliant annuities can play a powerful role in a client’s long-term care plan if used carefully so that the client does not run afoul of the strict Medicaid resource rules. Clients have often purchased these annuities only to find themselves challenged on the grounds that the annuities represent available resources that can prevent Medicaid eligibility.
In recent weeks, however, a Third Circuit appeals court has taken an important step toward ensuring that long-term care expenses can be met using annuities—even if the annuity in question is a short-term annuity purchased specifically to cover expenses incurred during periods when the client is ineligible for Medicaid coverage.
Zahner: The Facts
In Zahner v. Secretary, Pennsylvania Department of Human Services (DHS), the plaintiffs were Medicaid applicants and nursing home residents who had received large gifts that would have caused them to become ineligible for Medicaid coverage. In order to cover nursing home expenses during these relatively short periods (14 and 12 months), they purchased single premium immediate annuities.
The terms of the annuities were short and matched each plaintiff’s Medicaid ineligibility period—one was an $85,000 annuity that paid $6,100 per month for 14 months, and the other a $53,000 annuity that paid $4,499 per month for 12 months. The Pennsylvania DHS argued that these annuities did not constitute “annuities,” so that they could not be excluded from the plaintiffs’ available resources when determining Medicaid eligibility, because of their short terms.
DHS argued that an annuity must have a term of at least two years in order to qualify. Further, it argued that the annuities were not actuarially sound because they did not correspond to a reasonable estimate of the plaintiffs’ life expectancies and that they should be treated as trust-like devices rather than annuities.
The court disagreed, finding instead that there is no minimum term requirement that an annuity must satisfy in order to qualify as a Medicaid compliant annuity. Further, the court found that the annuities did reasonably correspond to the plaintiffs’ life expectancies despite the fact that their life expectancies exceeded the term of the annuities. The court held that there is no minimum term requirement for an annuity to be actuarially sound—instead, it is only required that the annuity be actuarially sound in a way that ensures the term of an annuity will not be longer than the life expectancy of the annuitant (as determined by the Social Security life expectancy tables).
The court also rejected DHS’ argument that the annuities were more similar to trusts, finding that commercial annuities cannot be treated as trusts because the Health and Human Services Secretary has not specified that they be treated as trusts.
Importantly, the court’s ruling makes clear that the plaintiffs’ motive in purchasing the annuities is not a relevant consideration in determining whether they qualify as Medicaid compliant annuities.
Medicaid Compliant Annuity Basics
Generally, Medicaid compliant annuities are used to allow an individual to use funds in excess of the Medicaid-permitted resource allowance to purchase an annuity that provides additional income for the remainder of a healthy spouse’s life expectancy. In this case, the court made clear that such an annuity can also be purchased in order to fund the unhealthy spouse’s long-term care expenses.
In order to qualify as a Medicaid compliant annuity under the federal Deficit Reduction Act (DRA), the terms of the annuity contract must satisfy certain criteria. The annuity contract must be irrevocable and non-assignable, it must be actuarially sound, and it must provide payments in equal installments over the term of the annuity (i.e., there can be no deferral or balloon-like payments).
Further, the state must be named as the remainder beneficiary on the contract, allowing it to receive up to the amount that it has paid for the institutionalized individual’s long-term care through Medicaid.
The Third Circuit answered an important question in this case, but it is important to note that clients must remain cautious when purchasing annuities as a part of their Medicaid planning. While this represented a novel challenge to this strategy, it is likely that other challenges will arise in the future.
Originally published on Tax Facts Online, the premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.
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