The Deficit Reduction Act of 2005 (“the DRA”) was signed into law
by President Bush on February 8, 2006. The provisions of the DRA were designed
in part to make it much more difficult for an individual to transfer his or
her assets with the goal of becoming eligible for Medicaid coverage of nursing
home and other expenses. On December 20, 2006, the President signed the Tax
Relief and Health Care Act of 2006, which contained a “technical amendment”
of the DRA dealing with the treatment of annuities in elder law planning which
makes the use of immediate annuities less attractive than under the original
version of the DRA.
For Medicaid qualification purposes, assets are categorized into “countable
resources” and “exempt resources.” Examples of countable resources
are cash, checking accounts, savings accounts, certificates of deposit, stocks,
bonds, mutual funds, deferred annuities, real estate other than the primary
residence, and any cars after the first one. Exempt resources include a personal
residence (the DRA imposes a cap on equity of $500,000, which can be increased
to $750,000, if the state elects to do so),1
one car or truck, burial plots, certain life insurance policies, furniture and
furnishings, and common types of jewelry. In some states, a retirement account
such as an IRA is also an exempt resource as long as it is paying out the annual
minimum distributions required by the IRS.
An “institutionalized” person (the nursing home resident seeking
Medicaid for nursing home care) can only have a small amount of “countable
resources.” In California, the amount is $2,000. Where the institutionalized
person is married, the spouse of the institutionalized person (known as the
“community spouse”) can keep an additional amount of countable assets.
These funds are known as the “Community Spouse Resource Allowance”
or “CSRA”. In California, the CSRA is currently $101,640.
Immediate annuities have been used to convert countable assets into an income
stream which does not make the institutionalized person or spouse ineligible
for Medicaid coverage. An immediate annuity is a contract with an insurance
company under which, in exchange for a lump sum payment, the company agrees
to pay the annuitant a monthly amount for a period of time. The duration of
the payments may be a fixed number of years, for life, or a combination of the
two – that is life with a certain number of years guaranteed.
Prior to the DRA, if the annuity met certain requirements the conversion of
countable assets into an income stream was not considered a transfer of assets
and the institutionalized person could spend down his assets and qualify for
Medicaid coverage.
If the annuitant was a single institutionalized person, the monthly annuity
payments would have to go to the nursing home. The annuity would pay off only
if the institutionalized person died during the annuity's guaranteed payment
period, in which case the balance of the guaranteed payments could go to the
beneficiaries under the annuity.
Immediate annuities have always made a lot more sense for community spouses.
The community spouse could liquidate excess assets and convert the assets to
an income stream that would continue to support them.
The DRA, in language that was less than clear, attempted to restrict the use
of annuities. It required that, upon the death of the annuitant, the state Medicaid
agency be reimbursed for its payments on behalf of the annuitant out of any
remaining guaranteed annuity payments before they are paid to any other remaindermen.
By using the term "annuitant" this new repayment obligation only applied
to annuities purchased by the institutionalized person where he was also the
annuitant. Annuities purchased by the community spouse would only have to repay
the state Medicaid agency if the community spouse also needed Medicaid-covered
nursing home care during the annuity’s guaranteed payment term.
The new technical amendment changes the language requiring repayment from
annuitant to institutionalized individual. The result is that the community
spouse must now name the state Medicaid agency as the remainder beneficiary
on her annuity for any payments made on the institutionalized spouse’s
behalf. 2
The change in the law makes annuities somewhat less attractive than they were
before. But it doesn’t mean that this type of planning is dead. The new
rule means that if the community spouse dies before the end of the annuity term,
the future annuity payments will go to the state Medicaid agency. However, the
advantages of purchasing the annuity in terms of ending a huge outflow of savings
to pay for nursing home care and guaranteeing the community spouse enough income
to pay her basic needs are so great that the planning technique still makes
sense in some circumstances.
The technical amendment will likely cause shorter-term immediate annuities to
be used. The shorter the guaranteed term certain of an annuity, the higher the
monthly payment. In the past, a community spouse might opt for a lifetime annuity
with smaller monthly payments, which would be a terrific investment if she lived
longer than her actuarial life expectancy. Community spouses now are more likely
to choose a shorter, term-certain benefit period, rather than a benefit for
life. Under this planning approach, the community spouse will have her funds
returned quickly and she will be more likely to outlive the annuity, resulting
in lesser likelihood of repayment to the state.
ABOUT THE LAW OFFICE OF ROY W. LITHERLAND
The Law Office of Roy W. Litherland is devoted exclusively to estate planning,
Medi-Cal planning, trust and probate law and routinely advises its clients on
many estate planning techniques, including the use of life insurance and irrevocable
life insurance trusts in advanced estate planning.
Attorneys Roy W. Litherland and Rey Gervacio have over 44 years of legal experience
between them. Roy W. Litherland is certified as a Legal Specialist in Estate
Planning, Trust and Probate Law by the California State Bar Board of Legal Specialization
and was previously licensed as a Certified Public Accountant. Rey Gervacio holds
LL.M degrees in Taxation and International Legal Studies, and is currently working
on his S.J.D. degree in International Estate Planning. Roy and Rey are members
of the American Academy of Estate Planning Attorneys, the National Academy
of Elder Law Attorneys, and the California Advocates for Nursing Home Reform.
The Law Office of Roy W. Litherland regularly conducts public seminars and
continuing education classes on estate planning, Medi-Cal planning, and related
topics, and can be reached at (408) 356-9200 or (831) 476-2400.
1 There are no home equity
limitations under current California Medi-Cal law. The California Department
of Health Services will seek an increase in the equity limit to $750,000 and
consider various options as to how to determine home equity value. State regulations
will be sought for implementation of the home equity rules provision once California
law changes to W & I Code §14006 are enacted. Pursuant to the California
Advocates for Nursing Home Reform (CANHR), it will take some time to develop
the equity value and hardship criteria, and the legislation and regulations,
therefore, these provisions are not likely to go into effect until 2008.
2 California law currently holds that the principal
in an annuity is considered “unavailable” for the purposes of Medi-Cal
eligibility as long as the annuity is structured to pay out fixed, equal payments
over the actuarial life of the beneficiary. Any income from the annuity is counted
toward the share of cost. Pursuant to California regulations filed in 2004,
annuities purchased on or after 9/1/04 are subject to Medi-Cal recovery. Work
related pensions and annuities are considered “unavailable” if the
beneficiary receives periodic payments of interest and principal and exempt
for the community spouse. Pursuant to CANHR, the statutory and regulatory changes
regarding the DRA and the treatment of annuities may take a year or more to
implement in California.
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