Tuesday, October 29, 2013

6th Circuit: No Medicaid Penalty on Annuity Purchased for Sole Benefit of Community Spouse

Annuities have become a vital planning tool to protect a married couple's savings from the costs of long-term care. Federal Medicaid law authorizes the use of specialized annuities to gain immediate eligibility for Medicaid long-term care benefits provided the annuity complies with the provisions of the law.

In effect, people with too many resources to qualify for Medicaid can make those excess resources “disappear” through the purchase of the right annuity investment. (It’s important to note that expert help from a qualified elder law attorney should be sought before an annuity is purchased. The purchase of an annuity that does not meet legal requirements can result in a couple becoming ineligible for Medicaid long-term care benefits for a very long time.)

On October 25th, the United States Court of Appeals for the Sixth Circuit handed down a decision in an Ohio case which found that an annuity purchased by a community spouse was not subject to Medicaid transfer penalties. In the case, Hughes v. McCarty, the court held that since the annuity purchase occurred before the state Medicaid agency determined that Mrs. Hughes was eligible for Medicaid coverage, federal law permits an unlimited transfer of assets “to another for the sole benefit of the individual’s spouse.”

In addition, the Hughes decision suggests that restrictions on naming remainder beneficiaries of the annuity do not apply when an annuity is purchased for the sole benefit of the community spouse.
The Facts in Hughes
Mrs. Hughes entered a nursing home in 2005. For nearly four years, Mr. Hughes paid for his wife’s nursing home costs using the couple’s resources, which largely consisted of funds from his IRA account.  In June 2009, about three months before Mrs. Hughes applied for Medicaid coverage, Mr. Hughes purchased a $175,000 immediate single-premium annuity for himself using funds from his IRA account. 

The annuity guarantees monthly payments of $1,728.42 to Mr. Hughes from June 2009 to January 2019, totaling nine years and seven months, which is commensurate with Mr. Hughes’s undisputed actuarial life expectancy.  Combined with other retirement income, the annuity increased Mr. Hughes’s monthly income to $3460.64 after the annuity took effect.

In the event of Mr. Hughes’s death, Mrs. Hughes is the first contingent beneficiary and the Ohio Medicaid agency is “the remainder beneficiary for the total amount of medical assistance furnished to annuitant[’s] spouse, [Mrs.] Hughes.”
Federal Medicaid Transfer Law
42 USC §1396p(c) sets out the federal law’s provisions for “taking into account certain transfers of assets.”  Most of the annuity related provisions of that section are found in Paragraph 1 of §1396p(c) [see, §§1396p(c)(1)(F) and (G)]. According to Paragraph 1, an annuity is to be treated as a penalty inducing transfer of assets unless the state is named as remainder beneficiary of the annuity to the extent of benefits paid to the institutionalized spouse, or in second position after the community spouse or a minor or disabled child.

In addition, under Paragraph 1, an annuity is to be treated as an asset of the community spouse unless it was either purchased with retirement plan funds, or it is irrevocable and non-assignable, actuarially sound, and provides for equal payments during its term.

In the Hughes case, the state Medicaid agency conceded that Mr. Hughes annuity was not a resource. But it argued that the annuity purchase constituted a transfer of assets because it named the institutionalized spouse as remainder beneficiary in front of the state in violation of the requirements of Paragraph 1.  

However, Paragraph 2 of the law (42 USC §1396p(c)(2)) sets out a number of transfers to which the penalties of Paragraph 1 do not apply. Paragraph 2 explicitly says that “An individual shall not be ineligible for medical assistance by reason of paragraph (1) to the extent that: …

        (B) the assets -

          (i) were transferred to the individual's spouse or to another for the sole benefit of the individual's spouse,

          (ii) were transferred from the individual's spouse to another for the sole benefit of the individual's spouse. . .

The 6th Circuit Court found that Paragraph 2 effectively trumps Paragraph 1. Mr. Hughes, who was the “individual’s spouse,” purchased the annuity for his sole benefit. (Since Mr. Hughes annuity was actuarially sound, the court found that it was for his "sole benefit"). This meant that the restriction of paragraph 1 did not apply to limit who he named as remainder beneficiary.  

The decision in Hughes v. McCarty is important. It suggests that an actuarially sound annuity purchased by a community spouse is not restricted in terms of the naming of remainder beneficiaries.  

Note that the decision is applicable in the 6th Circuit (Michigan, Kentucky, Ohio, and Tennessee). Courts in other circuits might differ with the decision.  

Friday, October 25, 2013

Going Wrong with a Do-It-Yourself Will

In September, the Pennsylvania Superior Court decided the appeal of Wayne Zeevering in a case involving a do-it yourself will. The appeals court upheld a lower court decision that required Wayne and his sister Diane to share their father’s residuary estate with their siblings.

The court required distribution to all five of George Zeevering’s children even though his will specifically said that he had intentionally failed to provide any distribution for three of them.

The court found that the father’s intentions were unclear since the will failed to include a clause disposing of the residuary estate. (The residuary estate is what is left over after all specifically gifted items have been distributed and estate expenses have been paid). As a result, the residuary estate ($217,000) was to be distributed in accordance with intestate laws (as if the father had died without a will.) In this case, the intestate laws provided for equal distribution to all of the children.

The Zeevering case illustrates the dangers of trying to do your will yourself, without competent legal advice.

Wayne’s father thought he could prepare an adequate will for himself, without getting help from a lawyer. But, “he didn’t know what he didn’t know.” He didn’t know his will should include a residuary estate clause.

The consequences of this mistake were terrible. Much of the father’s estate ended up being distributed to the children he was probably trying to disinherit. Perhaps even worse, his favored son Wayne was forced into costly litigation against his siblings.

In my over thirty years of practice as an estate planning lawyers, I have seen lots of do-it-yourself wills. These self-prepared wills almost always have contained significant holes or errors. An estate planning lawyer will know the right questions to ask, how to properly implement your intentions, and how to limit the potential for later family discord and litigation.

The Superior Court decision is Estate of Zeevering, 2013 PA Super 260 (Sept 26, 2013), http://tinyurl.com/km6qrs3.

Here is a previous article that I wrote about this sad Zeevering case after the lower court had first issued its opinion but before the appeals court ruling.

Case Illustrates Dangers of Do It Yourself Wills

George Zeevering probably thought he could save some money by writing his own will without getting the advice of a lawyer.

It seemed simple enough. He had five children but was close to only two of them, his son Wayne and his daughter Diane. He wanted to be sure that Diane got his red pick-up truck, so he put that in his self-drafted will. He also wanted to make sure that Wayne got his summer property in Maryland, so he put that down as well.

Apparently he didn’t want anything to go to his other three children so he wrote the following sentence in his will: “The failure of this will to provide any distribution to my children, Laura Bonner, Kathleen Archacki, and Jennifer Rios is intentional.”

More likely than not, this meant he wanted the rest of his estate (worth $217,000) to go to his favored children, Wayne and Diane. But he didn’t specifically say that in the will he wrote for himself. And now we will never know for sure what he wanted, because Mr. Zeevering died on August 3, 2011.

Diane did get the truck. And Wayne did end up with the Maryland summer property. But George’s will failed to specifically describe who should get the remainder of his estate. Judge’s call this a “residuary clause.” George’s will didn’t have one.

When there is no residuary clause, the undesignated portion of the estate goes according to the laws of intestacy. Those are the state laws that say who inherits from you if you didn’t leave an adequate will, trust, or other instructions. In George’s case, the Pennsylvania intestate laws say that his remaining estate should go equally to all five of his children.

Of course George didn’t know that. He wasn’t a lawyer. He probably thought that the remainder of his estate would go to Wayne and Diane. But the law can be very demanding. It contains traps for unwary people like George. He made a mistake that anyone could make. And his children Wayne and Diane ended up paying for it.

Now it’s bad enough that George’s carelessness in writing his own will meant that all of his children ended up in a lawsuit. And that the lawyer’s fees were many times more than George would have paid to have legal help to write his will.

Even worse, his favored children lost the lawsuit, and 60% of his estate went to the three children he probably wanted to get nothing. That’s the big problem with wills – if you make a mistake, or are unclear about something – it’s really hard to fix it when your will is read after you are dead.

Don’t be penny wise and dollar foolish. Don’t create a mess for your family as you leave this life behind. Save your family from unnecessary conflicts and expense. See a lawyer for advice when you are ready to prepare your will.

Further Reading:

Thursday, October 17, 2013

What Happens if your Name isn’t on the Deed and your Spouse Dies?

William Irish’s home is now owned by his stepchildren. This isn’t what he wanted when he signed a deed in 1990. Here is how it happened.

William and Janet Irish were married in 1982. Janet was a widow and had 3 children by her prior marriage. In 1987 William and Janet purchased a home in Corry, Pennsylvania.  
Tenancy by Entireties Property
Both William and Janet contributed towards the purchase price of the Corry property. At the time of purchase they had it titled in both their names as tenants by entireties (T/E). This is a form joint ownership by a husband and wife who are effectively treated like a single legal entity for purposes of the ownership.
One of its primary characteristics of T/E property is the right of survivorship: neither spouse can independently transfer their interest in the property to a third party by will. The property passes by law to the surviving spouse. Another consequence of T/E ownership is that debts and judgments against one spouse only do affect property held by the entireties. Thus, T/E ownership can serve as a form of asset protection.
In Pennsylvania, unless there is clear evidence to the contrary, property owned jointly by a husband and wife is presumed to be owned as T/E.   
After William retired in 1987 he started a small business, “Irish Air,” which was devoted to airplane maintenance. William was concerned about his potential liability resulting from the business’ operation. He consulted his lawyer who told him that the Corry home would not be subject to attachment by William’s creditors because it was owned as T/E.
Despite his lawyer’s advice, in 1990 William deeded record title to the Corry property into Janet’s name alone. He did so to protect it for liability purposes and also as a way of providing for Janet in the event he predeceased her. (He perhaps did not understand that the property would pass automatically to Janet upon his death under the prior T/E ownership). He would come to regret the day he disregarded his lawyer’s advice.
Janet’s Will
In 2003 Janet signed a Will that left $20,000.00 to William. She left the residue of estate to her three children. Her children were named to be executors of her estate.
Janet died in 2009. She and William had remained married until the time of her death. After Janet’s death her children, as her executors, sought entry into the Corry home. William refused. He claimed the property was his. He also claimed that an automobile should be his even though it was titled in Janet’s sole name. The children claimed that the real estate and automobile had passed to Janet’s estate and that ownership should now be transferred to them as part of the residue of her estate.
Constructive Trust
Since the property was titled in Janet’s sole name, it became an asset of her estate and subject to the terms of her Will. There was nothing in writing that showed that William and Janet intended that the Corry home should pass to William if Janet died first.
This meant William had to be creative in trying to come up with an argument as to why ownership should pass to him after his wife’s death. He asked to court to find that he was being wrongfully deprived of the property and to impose the remedy of a “constructive trust” over it. This would mean that Janet’s estate would be required to convey the home to him.
The lower court found in favor of the children and against William. It found that he had made a gift of the real estate to Janet, and that the constructive trust remedy was inapplicable.
William appealed to the Pennsylvania Superior Court which upheld the lower court’s decision. Irish v. Warnshuis (PA Superior Court, October 10, 2013).
The appeals court noted that
Generally, a “constructive trust” is defined as:  
a relationship with respect to property subjecting the person by whom the title to the property is held to an equitable duty to convey it to another on the ground that his acquisition or retention of the property is wrongful and that he would be unjustly enriched if he were permitted to retain the property.
William’s argument that there should be a “constructive trust” required him to show the existence of one of the following:
(a)          that the property transfer was procured by fraud, duress, undue influence or mistake, or
(b)          the transferee (Janet) at the time of the transfer was in a confidential relation to the transferor, or
(c)          the transfer was made as security for an indebtedness of the transferor (William).
William acknowledged that reasons (a) and (c) were inapplicable but he argued that the transaction involved a confidential relationship. That relationship arises when one party places confidence in the other with a resulting superiority and influence on the other side. Once it is determined that a confidential relationship exists, the burden of proof shifts to the transferee to show that she did not abuse that relationship.
But both lower and appellate court rejected William’s argument and found that there was no confidential relationship in this case. The appeals court noted that a marriage does not create a confidential relationship as a matter of law. William would have needed to prove it existed during this transaction, which he did not do.
Presumption that Gift was Intended
In general, the law in Pennsylvania establishes a presumption that a transfer of property between husband and wife is a gift. This presumption applies where property held in T/E is transferred to the wife alone. It can be rebutted only with clear, explicit and unequivocal evidence that the transfer was not intended as a gift.     
Lessons Learned
The result of the Irish case is that ownership of the surviving spouse’s home and car passed to his step-children.  It’s a pretty good guess that this was not what William intended when he deeded his interest in the home to his wife.
This rather sad result could have been avoided with a little more attention and advance planning. There are some lessons to be learned from this case:  
-       Be careful how you title your property. It can determine who will inherit it when the owner dies.
-       Consider the effect of how your property is titled (and beneficiary designations) when you prepare your Will.
-       Use written agreements to confirm understandings regarding property ownership.
-       Ignore your lawyer’s advice at your peril.