Inflation Indexed Annuities in Aging in Place Planning

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Rarely do articles on this blog deal with specific investment options.  Recently, however, while speaking with a client, she shared a feeling of helplessness following a meeting with her financial advisor.  A few phone calls sorted her options and planning.  This article is designed to educate readers regarding a planning option with which, apparently, some advisors and agents are unfamiliar.

Many who plan financially for aging in place focus on guaranteed income, rather than relying on large liquid amounts invested for further growth through investment risk. Aside from other arguments against risking principal, there is the simple fact that alternatives to institutional care (nursing homes and assisted living facilities) involve periodic costs, usually paid monthly or weekly.  In other words, if you have a healthy guaranteed income, within which you can easily meet additional expenses, the prospect of alternative care cost is not as disruptive as it might be otherwise. 

The issue that is increasingly on everyone's lips, however, is inflation.  Whether inflation is already built in to our economy, soon to arrive and/or well-in-hand by our Federal Reserve Bank, this article will leave to others to debate. A college economics professor once characterized inflation as not unlike water- a little bit is necessary and good, but a lot can kill you.  Regardless, even the long-term care industry is concerned.    

Sometimes called an inflation-protected annuity, an inflation-indexed immediate annuity is similar to a fixed annuity. You receive a guaranteed stream of income from the insurance company for the rest of your life. With an inflation-indexed annuity, however, payments increase (or sometimes decrease) each year, keeping pace with the rate of inflation.

An inflation-indexed annuity tracks standard measures of inflation, typically, the consumer price index (CPI)(one measure of the rate of change of the cost of a selected basket of goods, reflecting the rate of inflation). The monthly income from this form of annuity gradually changes with the CPI. Since money loses purchasing power with inflation, inflation index-tracking annuities theoretically allows your money to retain that power as inflation fluctuates.

Inflation-adjusted annuities have one obvious drawback: they initially begin with smaller payments than a traditional fixed payment plan. The effect of this is that it might take decades for the inflation-adjusted income to catch up to the fixed payment, which means there is a distinct possibility of reduced payouts for life if you die before they catch up.

Talk to you investment advisor, financial planner, or insurance agent.  This article doe not constitute financial advice, and is merely educational.  Your advisor can make specific recommendations after considering your circumstances, needs, goals, and objectives.    

Congress Considering Removing Medicaid Eligibility Planning Opportunities- Spousal Income Annuities Targeted

Congress is considering making it harder to qualify for Medicaid if a community spouse has an annuity.  The change is part of an effort to close what Congress considers "loopholes" in Medicaid law.

The proposed bill aims to prevent married couples from using assets to purchase an annuity for the community spouse, so that the institutionalized spouse can apply for Medicaid. The bill would count half of the income from a community spouse's annuity as income available to the institutionalized spouse for purposes of Medicaid eligibility. The House Energy and Commerce Committee held a hearing on February 1, 2017, to consider the changes.  It is unclear how eligibility will be changed since income can not be "liquidated" to pay for care.  Regardless, the proposed changes would mean that married couples would have one less tool available to create an adequate safety net for a community spouse affected by nursing home spend down.  

Along with limiting spousal annuities, Congress is also considering bills to count lottery winnings as income and require Medicaid applicants to prove U.S. citizenship or residency before receiving benefits.

For more information about the proposed legislation, click here.

Appellate Court Rule Approves Short Term Annuities Not Countable Resources For Medicaid

The Third Circuit Court of Appeals has ruled that a Medicaid applicants' short-term annuities are not resources even though the terms of the annuities were less than the annuitants' life expectancies. Zahner v. Secretary Pennsylvania Dept. of Human Services (3^rd Cir., Nos. 14-1328, 14-1406, Sept. 2, 2015).  

In three separate cases, Pennsylvania denied Medicaid applications on the grounds that annuity purchases were unlawful transfers.  Donna Claypoole's husband transferred money to their children and purchased a five-year annuity and a 14-month annuity before applying for Medicaid on Mrs. Claypoole's behalf. Medicaid applicant Connie Sanner also transferred money and purchased a 12-month annuity.  The original plaintiff Anabel Zahner deceased during the case, and was no longer a party  on appeal.

The three applicants filed a case in federal court, arguing that the annuities met the requirements of federal Medicaid law and should not have been considered transfers. All parties asked for summary judgment. The U.S. district court granted the plaintiffs summary judgment with regard to the five-year annuities, but denied summary judgment with regard to the shorter annuities, holding that the term of the annuity had to "bear a reasonable relatedness to the beneficiary's life-expectancy." The court also held that a Pennsylvania statute that purported to make all annuities assignable was preempted by the federal Medicaid law.

The U.S. Court of Appeals for the Third Circuit, affirmed the district court decision that federal law preempts Pennsylvania's law making all annuities assignable, but reversed the decision that the short-term annuities are resources. The court decided that "any attempt to fashion a rule that would create some minimum ratio between duration of an annuity and life expectancy would constitute an improper judicial amendment of the applicable statutes and regulations." The court further held that an annuitant's motive in purchasing an annuity is not dispositive of whether it is a resource.  

The decisions, which are expansive of consumer options in planning for Medicaid eligibility, will likely invite comparison and contrast with the recent Ohio Supreme Court decisions restricting consumer options.  

For the full text of this decision, click here.

Ohio High Court Rules That Transfer of Home Between Spouses Prior to Medicaid Eligibility Is Improper

A narrowly divided Ohio Supreme Court has ruled that the transfer of a home between spouses prior to Medicaid eligibility is an improper transfer and is subject to the community spouse resource allowance (CSRA) cap.  Estate of Atkinson v. Ohio Department of Job and Family Services (Ohio, No. 2013–1773, Aug. 26, 2015).  One year and six days after hearing oral argument in the case, the majority ruled that "federal and state Medicaid law do not permit unlimited transfers of assets from an institutional spouse to a community spouse after the CSRA (Community Spouse Resource Allowance) has been set."  The court distinguished, and did not overturn,  the 2013 federal appellate court ruling in Hughes v. McCarthy, that permitted use of spousal transfers using "annuities."

In 2000 Marcella Atkinson and her husband transferred their home into a revocable living trust. In April 2011, Mrs. Atkinson entered a nursing home and soon applied for Medicaid benefits. In August 2011, following Medicaid’s “snapshot” of the couple’s assets, the home was removed from the trust and placed in Mrs. Atkinson's name. The next day, Mrs. Atkinson transferred the house to her husband. The state determined an improper transfer had occurred and imposed a penalty period.  Mrs. Atkinson passed away, and her estate appealed to court, arguing that under federal and state statutes a spouse is not ineligible for Medicaid for transferring a home to the other spouse and that an institutionalized spouse may transfer unlimited assets to the community spouse between the date the spouse is institutionalized and the date that the spouse's Medicaid eligibility is determined. The estate lost at both the trial court and the Ohio Court of Appeals, and the estate appealed.  

In a 4-3 decision, the Supreme Court of Ohio rules that transfers between spouses are not unlimited after the snapshot date and before Medicaid eligibility and that such transfers are proper only up to the amount that fully funds the CSRA. The court rejected the estate’s reliance on the Sixth Circuit Court of Appeals’ holding in Hughes v. McCarthy (6th Cir., No. 12-3765, Oct. 25, 2013) that an annuity purchased by a community spouse before a Medicaid eligibility determination is not an improper transfer, finding that the purchase of annuities are subject to special rules and “not applicable under these facts.”  The court, however, remands the case for review of the penalty imposed because the Medicaid agency may have applied the wrong statute.  “Neither federal nor state law,” the court wrote, “supports the agency's confiscation, after the CSRA has been set, of the entire amount of transferred assets, some or all of which may have already been allocated to the community spouse on the snapshot date.”

A dissent joined by three justices states that “[w]hat this family did is and was permitted by state and federal law. . .  the home is explicitly excluded from the definition of 'resources' for purposes of establishing the CSRA.” (emphasis in original).  But, the majority rejected various "exempt asset" and "timing" arguments, in effect, interpreting state and federal law in the manner that would permit  sheltering the minimum possible assets after the ill spouse's admission to the nursing home.

For the full text of this decision, click here.