Annuities have become a vital planning tool to protect a married couple’s savings from the costs of long-term care. Federal Medicaid law authorizes the use of specialized annuities to gain immediate eligibility for Medicaid long-term care benefits provided the annuity complies with the provisions of the law.

In effect, people with too many resources to qualify for Medicaid can make those excess resources “disappear” through the purchase of the right annuity investment. (It’s important to note that expert help from a qualified elder law attorney should be sought before an annuity is purchased. The purchase of an annuity that does not meet legal requirements can result in a couple becoming ineligible for Medicaid long-term care benefits for a very long time.)

On October 25th, the United States Court of Appeals for the Sixth Circuit handed down a decision in an Ohio case which found that an annuity purchased by a community spouse was not subject to Medicaid transfer penalties. In the case, Hughes v. McCarty, the court held that since the annuity purchase occurred before the state Medicaid agency determined that Mrs. Hughes was eligible for Medicaid coverage, federal law permits an unlimited transfer of assets “to another for the sole benefit of the individual’s spouse.”

In addition, the Hughes decision suggests that restrictions on naming remainder beneficiaries of the annuity do not apply when an annuity is purchased for the sole benefit of the community spouse.

 The Facts in Hughes

Mrs. Hughes entered a nursing home in 2005. For nearly four years, Mr. Hughes paid for his wife’s nursing home costs using the couple’s resources, which largely consisted of funds from his IRA account.  In June 2009, about three months before Mrs. Hughes applied for Medicaid coverage, Mr. Hughes purchased a $175,000 immediate single-premium annuity for himself using funds from his IRA account.

The annuity guarantees monthly payments of $1,728.42 to Mr. Hughes from June 2009 to January 2019, totaling nine years and seven months, which is commensurate with Mr. Hughes’s undisputed actuarial life expectancy.  Combined with other retirement income, the annuity increased Mr. Hughes’s monthly income to $3460.64 after the annuity took effect.

In the event of Mr. Hughes’s death, Mrs. Hughes is the first contingent beneficiary and the Ohio Medicaid agency is “the remainder beneficiary for the total amount of medical assistance furnished to annuitant[’s] spouse, [Mrs.] Hughes.”

Federal Medicaid Transfer Law

42 USC §1396p(c) sets out the federal law’s provisions for “taking into account certain transfers of assets.”  Most of the annuity related provisions of that section are found in Paragraph 1 of §1396p(c) [see, §§1396p(c)(1)(F) and (G)]. According to Paragraph 1, an annuity is to be treated as a penalty inducing transfer of assets unless the state is named as remainder beneficiary of the annuity to the extent of benefits paid to the institutionalized spouse, or in second position after the community spouse or a minor or disabled child.

In addition, under Paragraph 1, an annuity is to be treated as an asset of the community spouse unless it was either purchased with retirement plan funds, or it is irrevocable and non-assignable, actuarially sound, and provides for equal payments during its term.

In the Hughes case, the state Medicaid agency conceded that Mr. Hughes annuity was not a resource. But it argued that the annuity purchase constituted a transfer of assets because it named the institutionalized spouse as remainder beneficiary in front of the state in violation of the requirements of Paragraph 1.

However, Paragraph 2 of the law (42 USC §1396p(c)(2)) sets out a number of transfers to which the penalties of Paragraph 1 do not apply. Paragraph 2 explicitly says that “An individual shall not be ineligible for medical assistance by reason of paragraph (1) to the extent that: …

(B) the assets –

(i) were transferred to the individual’s spouse or to another for the sole benefit of the individual’s spouse,

(ii) were transferred from the individual’s spouse to another for the sole benefit of the individual’s spouse. . .

The 6th Circuit Court found that Paragraph 2 effectively trumps Paragraph 1. Mr. Hughes, who was the “individual’s spouse,” purchased the annuity for his sole benefit. (Since Mr. Hughes annuity was actuarially sound, the court found that it was for his “sole benefit”). This meant that the restriction of paragraph 1 did not apply to limit who he named as remainder beneficiary.

The decision in Hughes v. McCarty is important. It suggests that an actuarially-sound annuity purchased by a community spouse is not restricted in terms of the naming of remainder beneficiaries.

Note that the decision is applicable in the 6th Circuit (Michigan, Kentucky, Ohio, and Tennessee). Courts in other circuits might differ with the decision.

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