Friday, September 4, 2015

Court Approves Use of Short Term Annuities in Medicaid Planning

[On September 2 the Federal Third Circuit Court of Appeals issued a decision approving an important Medicaid qualification planning technique which involves the use of short term annuities. The following guest article was written by Matt Parker a principal with Marshall, Parker and Weber in Wilkes-Barre, Pennsylvania. It is reprinted here with his permission. An article written by Mr. Parker and myself was quoted by the Court in its opinion.]

In a strongly worded opinion, the United States Court of Appeals for the Third Circuit ruled that short term annuities are a legitimate Medicaid planning tool that can help applicants for Medicaid address ineligibility periods caused by a gift. The decision reverses a District Court holding that had cast some doubt on the use of short term annuities in the Medicaid planning field.
Medicaid Annuities are valuable planning tools for helping couples and individuals qualify for Medicaid. Spousal annuities help to shelter additional resources for a community spouse when one spouse is entering a nursing home.  Annuities purchased by the institutionalized person can help pay through an Medicaid ineligibility period caused by a gift made during the five (5) year look back period.
Pennsylvania’s Department of Human Services (DHS) has occasionally taken issue with the use of annuities in Medicaid planning. Over the years, various policies and regulations of DHS have been challenged in court, resulting in decisions favorable to applicants. See Mertz v. Houstoun, 155 F.Supp.2d 415 (E.D. Pa. 2001); James v. Richman, 465 F.Supp.2d 395 (M.D. Pa. 2006), aff’d, 547 F.3d 214 (3d Cir. 2008); Ross v. DHS, 936 A.2d 552 (Pa.Cmwlth. 2007); Weatherbee v. Richman, 595 F.Supp.2d 607 (W.D. Pa. 2009), aff’d, 351 Fed. Appx. 786 (3d Cir. 2009).
In the latest court case of Zahner v. Secretary Department of Human Services, DHS challenged the use of Medicaid annuities on new grounds. In the Zahner case, two applicants for Medicaid had purchased single premium, irrevocable, immediate annuities to help them pay through an ineligibility period for Medicaid caused by a gift.  The payment from the annuities (along with other income sources) was used to pay the nursing homes during the ineligibility periods. The ineligibility periods were short - 14 and 12 months – and thus the term of the annuities coincided with these short terms.
DHS contended that the annuities in these cases: a) Did not constitute annuities due to the short terms; b) Must have terms of at least two (2) years to constitute a valid annuity; c) Do not meet the definition of an actuarially sound annuity since the terms were not reasonably related to the life expectancy of the applicant; and d) Should be considered trust-like devices and not annuities.
The Court of Appeals dismissed each argument made by DHS:
1) The Court found that there is no minimum term required for a Medicaid compliant annuity. In addition, the fees charged for the purchase of an annuity do not have an impact on the definition of an annuity; and the annuitant's motive in purchasing the annuity is not determinative.
2) The term of the annuity complies with Medicaid rules if it is for any period that does not exceed the life expectancy of the annuitant as defined by Social Security life expectancy tables;
3) The Court also dismissed the trust-like device argument, finding that commercial annuities cannot be defined as trusts.
The opinion is strongly worded in favor of the use of annuities under the terms and conditions that Congress and the Federal agencies have set forth, rebuking efforts by DHS and the District Court to create restrictions on the use of Medicaid Annuities beyond the provisions in the Federal law.
Those who are interested in the use of annuities in Medicaid planning and how they may help you or your clients, are encouraged to visit the website of Pennsylvania Care Management (PCM)* at PCM helps elder law attorneys in Pennsylvania identify and purchase the most appropriate Medicaid Annuities for their clients. (In its opinion the Zahner court actually quotes from a PCM website article written by Jeff Marshall and me that explains the relationship between annuities and the DRA. That article is posted on the PCM website.)

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