Groundbreaking Medicaid Case Changes Landscape
Just as I was proverbially speaking on my way out the door for vacation, a ground breaking Medicaid case was decided that establishes a “safe harbor” for Medicaid planning. The case is a Pennsylvania case from the federal Third Circuit Court of Appeals but has implications throughout the country. It is one in which organizations to which I belong, the National Academy of Elder Law Attorneys (NAELA) and the Pennsylvania Association of Elder Law Attorneys (PAELA) have been deeply involved. The question was whether Congress really meant what it said when it carved out an exception in the Medicaid rules.
Anabel Zahner v. Secretary Pennsylvania Department of Human Services, answered the question whether a specific planning tool known as a DRA compliant immediate annuity can be safely used for Medicaid planning. It is important especially for spouses for planning because, for many of our clients the most significant question after determining that her or his spouse is going to be properly cared for in a nursing home is “how can I survive if all of his (or her) income is going to go to the nursing home to pay for care?”
What many average consumers do not realize and is typically ignored is that Medicaid residents do pay for their care – even while on Medicaid. They contribute their monthly income. What a wife, in particular, may experience along with the transfer of her spouse to a nursing home, is loss of his income which may have been needed to meet regular expenses of daily living. Although some at-home spouses with especially low income may be able to claim on the nursing home spouse’s income, this can come with other problems.
Spousal Medicaid immediate annuities are different from the kind of product that is usually thought of as an annuity. An immediate annuity is one where assets are converted into an income stream paying income to the beneficiary usually on a monthly basis. These products, in their specific Medicaid forms, have been used for several years by planners but there had been some questions. Can they be short term, giving the spouse at home at least enough income to equal what she or he has lost? Or do they have to be longer term giving a tiny monthly income not enough to cover expenses? If all the rules are followed, will the Courts follow the rules as written or will other rules be applied?
The Medicaid rules are specific about the terms of a Medicaid DRA compliant annuity – they have to be irrevocable, non-assignable, actuarially sound not exceeding the actuarial life of the individual, name the government as a potential beneficiary and so on. This is not the kind of planning for amateurs or someone who works with one once or twice a year. Because this is a financial product, insurance carriers are involved. The rules need to be followed. However, when done correctly they provide a much appreciated sense of financial security for a spouse already reeling from the need to move his or her spouse to a nursing home for care.
The Zahner decision answers these questions provided planning is done before assets are exhausted to the point that there is little available to plan. Planning cannot begin effectively when most of the assets have been spent, even if they were spent for care.
There is another use. This insurance product can also be used for what are known as gifting annuities. Usually we use gifting annuities is to handle gifting that was done previously without knowledge of the Medicaid rules. Here is some explanation.
The five year lookback period for Medicaid has become a major source of confusion. However, there can be ways to correct mistakes. Grandparents routinely give money to children to tide them through difficult times or to grandchildren to help them pay for college. All of these are gifts under the Medicaid rules and can result in penalties if assistance is needed. Large contributions to church or charities can also result in penalties.
If gifting can result in penalties, the kind of immediate annuity addressed in the Zahner case can be used to soften the effects and, in some cases to prevent penalty altogether. Medicaid immediate annuities are not the only answer and Medicaid is not the only tool for long term planning. If there are questions, go for help. This new decision provides some needed certainty going forward.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.