Court Upholds Medicaid Annuities

Ten years ago, the landscape of asset protection or Medicaid planning changed dramatically with the passage of the Deficit Recovery Act (DRA) of 2006.  In relevant part, this act impeded prudent estate planning for individuals seeking to secure their assets from long term care costs by expanding the lookback period for gifting from three years to five years, and by deferring the calculation of any period of ineligibility so that it would not run until an individual’s assets were depleted.  It effectively created a minimum 5 year penalty for gifting which eliminated many of the middle class families whom both parties stress they are “looking out for” from even a modest amount of asset protection.

One protection which arose from this law, though, was what is known as a Medicaid annuity.  In essence, if an individual enters into a nursing home, his or her spouse who is remaining in the community, can keep the home, a car, and one-half of the liquid assets not to exceed $119,200.  However, if that spouse owns an Individual Retirement Account (IRA), he or she can convert same into an annuity, and keep that as well.

In order for the annuity to be accepted as exempt from being spent down for Medicaid eligibility, it must meet a variety of criteria.  It must be irrevocable, non-assignable, with immediate payout and actuarially sound among other requirements.  Over the past decade, many such annuities have been established and accepted by state Medicaid offices.

Over the past year, however, judicial intervention was necessary to avoid attacks by the States on this valid form of asset protection.   In 2010, Donna Claypoole entered a nursing home in Pennsylvania.  When her husband applied for Medicaid on her behalf, the Pennsylvania Department of Human Services denied the application stating that annuities were countable assets and must be spent down.  The U.S. District Court, on appeal, upheld the State’s determination declaring annuities “sham transitions”.

Fortunately, the Third Circuit reversed this decision. Zahner v. Sec’y Pa. Dep’t of Human Servs., 802 F.3d 497 (3d Cir. 2015). In doing so, it noted that Congress created a safe harbor under which certain annuities are not to be counted as resources in determining Medicaid eligibility.  The annuities purchased by the Claypooles qualified for this protection.   Thus, Medicaid annuities remain a viable asset protection technique.

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