States Attack Community Spouse Income Planning

One of the benefits of an annuity in estate and government benefits planning is the ability to convert assets countable for the purpose of determining Medicaid eligibility, and therefore subject to long term care spend down, to income for a community spouse, that is not countable, and therefore, not subject to spend down. This strategy is particularly comforting to a community spouse, who often is confronted with the task of making limited assets and income last over a lifetime. Given that the community spouse is often a younger female with a much longer life expectancy than the institutional spouse, providing a guaranteed income that the spouse cannot outlive from assets that otherwise would be extinguished by long term care is an important goal for seniors and their families, and the planners representing them.

This technique is not common, and is not without its risks. The community spouse must make an irrevocable decision preferring income over assets the spouse could otherwise spend without limitation. As income, the spouse has comfort in meeting routine obligations, but does not have a large pool of convertible assets as a safety net. The spouse gives up flexibility and liberty to convert a lump sum of assets to whatever purpose the spouse might have. Moreover, the technique means making a decision to prefer taking care of the surviving spouse at the expense of an inheritance for the children. Under the Deficit Reduction Act of 2005 (DRA), the state must be the beneficiary of any residue upon the death of the community spouse.

Nonetheless, states have waged an aggressive battle in the courts to prevent families from converting assets to income, but have, to date, been largely unsuccessful. The Third Circuit Court of Appeals, for example, recently held that since the annuity payment is payable to the community spouse, it is income and should not be included in the eligibility calculations, regardless of whether it can be sold on the secondary market. Weatherbee v. Richman, 2009 U.S. App. LEXIS 24939 (2009). See also, Vieth v. Ohio Dep't of Job and Family Servs., 2009 Ohio 3748 (Ohio Ct. App., Franklin County, July 30, 2009) (where community spouse purchased $140,000 annuity, court granted Medicaid benefits to the institutional spouse). But see, N.M. v. DMAHS, 405 N.J. Super. 353 (2009) (annuity is countable for Medicaid purposes if it can be sold in the secondary market).

Now, apparently conceding defeat in the courts, the National Association of State Medicaid Directors (NASMD) has sent a letter to the Center for Medicaid and State Operations (CMS) requesting that the Agency revisit its treatment of community spouse annuities. NASMD seeks to foreclose a family from preferring income for the benefit of a community spouse over assets, the latter of which may be lost in a long term care spend down.The effort, if successful, would reverse years of accepted law and practice. In the 1993 Omnibus Budget Reconciliation Act (OBRA), Congress delegated the Medicaid treatment of annuities to the Secretary of Health and Human Services (HHS). 42 U.S.C. § 1396p(d)(6). CMS then exercised that authority in Transmittal 64 to the State Medicaid Manual which contained the Secretary's determination. The treatment was modified somewhat by the DRA, but recent cases have upheld the purchase of DRA compliant annuities by community spouses to protect resources in excess of the default Community Spousal Resource Allowance (CSRA). NASMD now wants CMS to change its rules so that annuities will be treated like trusts which would make them countable and available resources.  More importantly, the change removes from community spouses the opportunity to make assets

NASMD, in its letter writes:

“..our member states are concerned and are increasingly being confronted with financial schemes that inappropriately shelter resources and assets from being properly counted under the Medicaid eligibility rules. In particular, in various states annuities are marketed, sold and made payable to the community spouse, however, these annuities were purchased with hundreds of thousands of dollars of the couple's resources. These annuities are marketed as "Medicaid compliant," meaning that the money used to purchase the annuity complies with the Deficit Reduction Act of 2005 (DRA) and cannot be sold on the secondary market, which would have rendered the market value of the annuity as a resource for eligibility purposes.”

Of course, the fact that courts have sanctioned the technique suggests that it is not a “financial scheme” that “inappropriately” shelters resources from “being properly counted.” NASMD, nonetheless, requests that CMS establish “clear guidance, followed by regulations, to specify that these annuities are trust-like devices and the entire amount used to purchase these annuities must be counted in determining eligibility.” Letter from Ann Clemency Kohler, NASMD Director, dated March 10, 2010 (emphasis added).

It is particularly troubling that the effort comes at a time when both the Senate and the Obama Administration are taking steps to encourage greater utilization of annuities to provide adequate post-retirement income. See, "Value of Annuities Behind Fed Efforts to Boost Retirement Income."  The effort of NASMD seems  to conflict with what otherwise should be the role of good government, i.e., encouraging citizens to use their resources most efficiently to take care of themselves. It is particularly because this planning technique benefits no one other than the community spouse, that differentiates it from other planning techniques such as “promissory note” arrangements, which are designed to also protect inheritance from long term care spend down. One would think that the states would have a compelling interest in every community spouse having sufficient income to meet his or her needs for the remainder of his or her life, given that it is the state that will likely be required to rescue the community spouse if his or her income is insufficient to meet such needs.

If you would like to read the letter from NASMD to CMS, please click here. If you would like to see the letter Attorney Donohew has written to CMS in response, please click here.