When Decisions Matter.

Short-Term Annuities Remain a Viable Medicaid Planning Strategy

Pennsylvania participates in the federal Medicaid program, under which Pennsylvania receives federal funding to provide medical assistance to qualified needy individuals. Under federal law, a comprehensive asset counting scheme determines which assets are counted for Medicaid eligibility. An applicant over the asset threshold is ineligible for government benefits.

The basic rule under Medicaid eligibility guidelines is that a transfer of assets by the Medicaid applicant for less than fair market value creates a period of ineligibility, if made within five years prior to filing for Medicaid. However, Medicaid planning attorneys often use compliant annuities as a method of preserving assets from the rising cost of health care and nursing homes. An annuity is a contract whereby an individual pays a lump-sum premium at the start of the contract in exchange for a fixed payment over a period of time.

In the recent opinion of Zahner v. Secretary Pennsylvania Department of Human Services, the Third Circuit Court of Appeals was called upon to determine whether short-term annuities are considered “countable resources” when determining Medicaid eligibility.  In Section 1396p of the United States Code, Congress created a “safe harbor” provision in which certain annuities are not countable resources for Medicaid eligibility. That section provides that annuities are not considered countable resources so long as the annuity: (1) names the State as the remainder beneficiary up to the Medicaid lien amount, (2) is irrevocable and nonassignable, (3) is actuarially sound, and (4) provides for payments in equal amounts during the term of the annuity, with no deferrals or balloon payments.

The plaintiffs in Zahner each made substantial cash gifts to family members resulting in a period of Medicaid ineligibility. To cover the cost of the ineligibility period imposed by these transfers, the plaintiffs purchased 12 and 14 month short-term annuities.  The Pennsylvania Department of Human Services (DHS) counted the purchase of said short-term annuities as countable resources and imposed an additional penalty period on the plaintiffs.

The Court disagreed with DHS, and refused to characterize these short-term annuities as “sham transactions” which were intended to shield resources for Medicaid eligibility. Instead, the Court held that so long as the short-term annuity meets the safe harbor provisions, the annuitant’s motive for purchasing the annuity is not determinative, for three reasons. First, the Court held that the Medicaid statute does not require a positive rate of return as a prerequisite for an annuity to fall within the safe harbor. Second, the Court stated that Congress did not require any minimum term for an annuity to qualify under the safe harbor. Lastly, the court ruled that an annuity is actuarially sound for purposes of the safe harbor if its term is less than the annuitant’s reasonable life expectancy.

Medicaid Planning should not be undertaken without a thorough examination of client’s family circumstances and the assistance of experienced professionals who understand the intricacies of the rules. When Decisions Matter contact our Estate Planning Attorneys with any questions concerning Medicaid Planning, or any estate planning matter.

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