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How to Use Community

Spouse Annuities

Larger Version

DRA Compliant Annuities for the Community Spouse:

Avoiding Transfer and Resource Traps

By Jeffrey A. Marshall, CELA*

Under the harsh transfer provisions of The Deficit Reduction Act of 2005 (DRA), compliant annuities have become a principal means of protecting a married couple's assets from the cost of long term care.

Both federal law and Pennsylvania policy allow a community spouse to purchase an annuity as a way to "spend down" a couple's excess resources. As a result, the institutionalized spouse becomes immediately eligible for Medicaid.

As with most aspects of Medicaid law, this use of annuities presents traps that must be avoided. The purchase of the annuity must avoid being treated as a penalized transfer of assets. And the annuity must be treated as income rather than as a resource.

The following discussion of current Federal law and Pennsylvania guidance on the purchase of DRA compliant annuities by a community spouse discusses some of the issues involved in avoiding these traps. It is intended primary for Pennsylvania lawyers who are familiar with general Medicaid Planning concepts.

 

Avoiding Transfer Penalties

The Deficit Reduction Act of 2005 (DRA) mandates that a post-DRA annuity must be treated as a transfer of assets unless it:

(1) is either

(A) a qualified retirement annuity; or

(B) it meets the following three requirements:

(i) The annuity is irrevocable and non-assignable;

(ii) The annuity is actuarially sound;

(iii) The annuity provides for payments in equal amounts, with no deferral and no balloon payments made.

AND

(2) names the State as the remainder beneficiary in the first position for the total amount of medical assistance paid on behalf of the institutionalized individual, unless there is a community spouse and/or a minor or disabled child. . . . If there is a community spouse and/or any minor or disabled child, the State may be named in the next position after those individuals.

If these provisions are met, an annuity purchased by a community spouse should not be treated as transfer of assets and no transfer penalty will be imposed.

 

Avoiding Treatment as a Resource

Even though a properly structured annuity purchase is not subject to a transfer penalty under the DRA, Pennsylvania ’s Operations Memorandum on Annuities, discussed below, takes the position that the income from the annuity is countable as a resource in some limited situations. If annuity income is treated as a resource, the married couple will remain over-resourced and the institutionalized spouse will not qualify for Medicaid/LTC. Thus, it is critical that an annuity purchased by a community spouse or institutionalized spouse be treated as income rather than as a resource.

Pennsylvania's position has been rejected by the Federal District Court for the Middle District of Pennsylvania.

In James v. Richman, 465 F.Supp.2d 395 (M.D. Pa. 2006), Pennsylvania sought to treat a $250,000 immediate annuity owned by a community spouse as a resource. The State argued that the stream of payments received by the community spouse from the annuity could be sold and was therefore a countable resource.

The Federal Court disagreed and ordered DPW to grant Medicaid/LTC benefits to Mr. James.

Defendant [DPW] essentially argues that, even if the income stream itself cannot be considered for purposes of determining Medicaid eligibility, the market value of that income stream should be a countable resource to preclude eligibility. Such a rule would completely undermine federal law, which excludes income of the community spouse from factoring into the institutionalized spouse's Medicaid eligibility. Indeed, a holding that the market value of an income stream derived from an irrevocable actuarially sound annuity is a countable resource would effectively contravene the MCCA [Medicare Catastrophic Coverage Act of 1988], which provides that "no income of the community spouse shall be deemed available to the institutionalized spouse." 42 U.S.C. § 1396r-5(b)(1). To be sure, Defendant's argument blurs the distinction drawn by the MCCA between assets and income.

Rather, so long as the principal or corpus of an irrevocable annuity or trust cannot be reached by the applicant or spouse, the income derived from such an asset cannot be counted as a resource for Medicaid purposes, notwithstanding that income stream's market value in the eyes of a third party.1

DPW has appealed the James decision to the Federal 3rd Circuit Court of Appeals. While that appeal is pending, some Pennsylvania attorneys, in reliance on the decision in James, are ignoring Pennsylvania ’s proposed resource restrictions. Other attorneys are taking a more conservative approach and are utilizing only annuities that will not be treated as a resource even if the James decision were to be overturned. Even under Pennsylvania ’s somewhat restrictive guidelines (discussed below) it is generally possible to protect all of a couple's resources.

Pennsylvania Operations Memo on Annuities

On March 3, 2007 the Department of Public Welfare published a Statement of Policy which implemented the DRA annuity changes. The Statement of Policy attempts to "clarify" Pennsylvania 's regulations in light of the changes mandated by the DRA as follows: 2

(h) Consistent with section 1917(c)(1)(F) and (G) of the Social Security Act, effective for an application made on or after March 3, 2007, the purchase of an annuity by an applicant or applicant's spouse on or after February 8, 2006, that does not meet all of the following requirements, will be treated as a transfer of assets for less than FMV:

(1) The annuity must be irrevocable and non-assignable.

(2) The annuity must be actuarially sound.

(3) The annuity must provide for payments in equal amounts, with no deferral and no balloon payments made.

(4) The annuity must name the Department as the remainder beneficiary in the first position for at least the total amount of medical assistance paid by the Department on behalf of the recipient. The annuity must name the Department as beneficiary in the second position when there is a community spouse (CS), minor child, or blind or permanently and totally disabled child for at least the total amount of Medical Assistance paid by the Department on behalf of the recipient and must name the Department in the first position if the CS or a representative of a minor child, or a representative of a permanently and totally disabled child disposes of any remainder for less than FMV.

(i) Consistent with section 1917(c)(1)(F) and (G) of the Social Security Act, effective for an application made on or after March 3, 2007, the purchase of a nonqualified annuity on or after February 8, 2006, by the spouse of an applicant, that does not name the Department as beneficiary in the first position will be treated as a transfer of assets for less than FMV.

(j) The provisions in this statement of policy do not prevent the Department from treating an annuity owned by an applicant or recipient or the spouse of an applicant or recipient that satisfies the requirements in subsection (h) or the requirement in subsection (i), as either income or a resource in the eligibility determination for long-term care services under the Medicaid Program.

On the same date, the Department also issued an Operations Memorandum on the subject of annuities as guidance for County Assistance Offices. A copy of the Operations Memorandum on Annuities is available online at http://paannuity.com/pdf/Annuities.pdf.

The DPW Operations Memorandum on Annuities specifies the circumstances under which the state intends to treat an annuity transaction as a transfer of assets. It also describes the circumstances under which it intends to treat an annuity as a resource as opposed to income. The Operations Memorandum distinguishes between the treatment of annuities owned by the institutional spouse and community spouse.

Institutionalized Spouse:

Under the Operations Memorandum, an annuity owned by an applicant for Medicaid/LTC (i.e. an institutionalized spouse) will be treated as income under two circumstances:

a. A qualified retirement plan annuity owned by the applicant/recipient that names DPW as the beneficiary in the first position will be counted as income (and not as a resource) to the applicant/recipient.

b. The purchase of a DRA compliant non-qualified annuity by an applicant/recipient will be treated as income rather than as a resource.

Community Spouse:

Under the Operations Memorandum, an annuity owned by a community spouse is to be given resource treatment in one of three ways - (1) as exempt, or (2) as income, or (3) as a resource, in accordance with the following directions:

a. A qualified retirement plan annuity of the community spouse is exempt as a resource.

b. A non-qualified annuity owned by the community spouse will be treated as either income or a resource depending upon the aggregate income of the community spouse. If the annuity provides the community spouse with monthly income that, when combined with all the other available income to the community spouse, is no greater than the CSMMNA,3 the annuity is to be treated as income to the community spouse.

c. If the annuity provides the community spouse with monthly income that, when combined with all the other available income to the community spouse, exceeds the CSMMNA, the annuity is to be treated as an available resource.

With conservative planning that fully complies with the CSMMNA limitations expressed in the DPW Operations Memorandum, a couple can often spend down all excess resources through the purchase of a DRA-compliant annuity or annuities. Depending on the CSMMA and amount of excess resources, conservative planning may involve two steps:

1. A community spouse first purchases a DRA compliant annuity with the community spouse as annuitant. The purchase of a DRA compliant annuity does not create a transfer penalty. To the extent that the community spouse monthly income, including the annuity payments, does not exceed the community spouse monthly maintenance needs allowance, the annuity will be treated as income rather than as a resource.

2. If there are still excess resources, the institutionalized spouse may purchase a second DRA-compliant annuity with the institutionalized spouse as annuitant and the community spouse as beneficiary. Since it is compliant with the DRA, the purchase of the annuity should not be treated as a transfer, and the annuity payments should be treated as income. Although the payments received by the institutionalized spouse need to be paid for the institutionalized spouse's care, accelerated or immediate eligibility for Medicaid may be achieved.

These CSMMNA based limitations are DPW guidelines only, and so not appear to be based on the DRA or other federal law. As noted above, some more aggressive planners are choosing to ignore the CSMMNA based limitations entirely, and are having the community spouse purchase an annuity for whatever amount is needed. This issue will hopefully be clarified when the 3rd Circuit's decision on the James appeal is announced.

*Attorney Marshall is Certified as an Elder Law Attorney by the National Elder Law Foundation under authority of the Pennsylvania Supreme Court. He is Managing Attorney of the Law Firm of Marshall, Parker and Associates with offices in Williamsport, Jersey Shore, Wilkes-Barre, and Scranton, PA. He is also the author of Elder Law in Pennsylvania, published by PBI Press. Attorney Marshall can be contacted at webmail@paelderlaw.com.

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1 James v. Richman, 465 F.Supp.2d 395 (M.D. Pa. 2006), http://www.paelderlaw.com/spousal_annuity.html. Mrs. James purchased her annuity prior to the enactment of the DRA. However, it appears that the DRA does not change the treatment of annuities for purposes of the MCCA income and resource rules. James was argued after the enactment of the DRA and both sides agreed that the DRA did not change the prior law in regard to when an annuity is a resource.

2 37 Pa.B. 1043

3 "CSMMNA" is the Community Spouse Monthly Maintenance Needs Allowance. Information on determining the CSMMNA is available on the Marshall , Parker & Associates website at http://www.paelderlaw.com/pdf/Determine_CSMMNA.pdf

 

   

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