Community Spouse's Annuity Cannot Be Recovered by State

Estate recovery is the authority of a state to recover costs for services rendered under the State Medicaid program upon the Medicaid recipient’s death.  A Massachusetts trial court has recently illustrated the limits to estate recovery, holding that the state is not entitled to recover Medicaid benefits from a community spouse’s annuity. 

Robert Hamel, a community spouse, purchased an annuity that named the state as primary beneficiary to the extent any Medicaid benefits are paid. His daughter, Laurie Dermody, was the contingent beneficiary. Mr. Hamel’s wife, Joan, was an institutional spouse who had entered a nursing home and applied for Medicaid. The state approved her application. 

When Mr. Hamel died, the state demanded payment from the annuity as reimbursement for benefits paid on Ms. Hamel’s behalf, and the annuity company paid the state. Mr. Hamel,  had never received Medicaid benefits,  but passed away while Mrs. Hamel was in the nursing facility. The Commonwealth demanded payment under the terms of the annuity for services rendered to Mrs. Hamel, even though she was neither the owner nor the annuitant on the policy.  

The daughter, Ms. Dermody, sued the state and the annuity company, claiming that she is entitled to the remainder of the annuity contract as the contingent beneficiary. Ms. Dermody argued that Mr. Hamel purchased the annuity under the “sole benefit rule,” 42 U.S.C. § 1396(c)(2)(B), which allows transfers to a spouse for the sole benefit of the spouse. The state argued that the “ to the extent benefits are paid” language in the annuity applied to benefits paid on behalf of Ms. Hamel.

The Massachusetts Superior Court granted Ms. Dermody’s motion for summary judgment. The court held that any transaction that satisfies the sole benefit rule is exempt from the transfer penalty rules, including the requirement to name the state as the primary beneficiary of an annuity. According to the court, Mr. Hamel “was not required to name [the state] as his primary beneficiary to the extent benefits were paid on [Ms. Hamel’s] behalf, and because [Mr. Hamel] did not receive [Medicaid] benefits himself, [Ms. Dermody] is the proper beneficiary of his annuity contract.”

This is a favorable decision for Massachusetts seniors, and permits seniors a strategy to preserve their assets for the next generation. The decision is, nonetheless, only a trial court decision, and does not have the weight of an appellate or supreme court decision by the state, or of a federal court decision.  It will be interesting to watch how other courts and jurisdictions treat the court's decision in Dermody v. The Executive Office of Health and Human Services (Mass. Super. Ct., No. 1781CV02342, Jan. 16, 2020).