Subscribers to ElderLawAnswers' new members-only Listserv on the Deficit Reduction Act of 2005 (DRA) have been treated to a lively exchange on how to interpret the new "law's" annuity provisions. Does the DRA's requirement that annuities name the state as the remainder beneficiary apply to annuities purchased with proceeds from retirement accounts? The National Academy of Elder Law Attorneys (NAELA) is taking the position that it does not. ElderLawAnswers member Patricia Sitchler, CELA disagrees, and some, but by no means all, ELA members are siding with her.
Below is a "point-counterpoint" discussion from the Listserv messages between Ms. Sitchler and fellow ELA members Stanley M. Vasiliadis, CELA and Robert C. Anderson, CELA. (All Listserv submissions reprinted with permission.)
Sitchler [6/6/06]: I recently reviewed the National NAELA interpretation of the annuity portion of DRA. I believe that NAELA's interpretation finds that if an annuity is a form of a retirement account (under IRC 408) or is a SPIA [single premium immediate annuity] that immediately starts paying in equal payments and is commercially reasonable, then those annuities do NOT have to name the state as a primary beneficiary.
I appear to be the Lone Ranger (appropriate for Texas, I guess) in that I do not agree with NAELA's interpretation. After carefully analyzing the statute, I believe that, although the statute was poorly written, the statute requires all annuities to name the state as a primary beneficiary.
Looking at the language of the statute in increments may help, so walk through the statute with me:
In order to meet the requirements of Medicaid eligibility for nursing home, etc benefits a state shall require, as a condition for providing Medicaid benefits that the application or recertification shall disclose a description of any interest the individual or community spouse has in an annuity REGARDLESS Of whether the annuity is irrevocable OR IS TREATED AS AN ASSET.
Such application or recertification form shall include the following statement: The state becomes a remainder beneficiary under SUCH ANNUITY (what SUCH annuity? all annuities that are disclosed, regardless of whether it is considered an asset) by virtue of providing Medicaid assistance.
So, here's the question: can we or can't we buy a SPIA without naming the state as a beneficiary?
Of course, if we take the NAELA route and are wrong, all we have to do is change the beneficiary designation.
But have you dealt with one of these insurance companies? They move like attorneys (slow). In the cases where waiver programs are involved, the beneficiary could lose their waiver eligibility prior to getting that beneficiary name changed and, in Texas, the waiting list for waiver programs runs from 3 years to 12 years.
Additionally, what if you advise a client to buy a SPIA and then on recert, the client is informed to either change the beneficiary designation or lose eligibility. The client may be very unhappy and claim that he/she would never have purchased the annuity if he/she had known it would require naming the state as the primary beneficiary -- and what are you going to do to fix this now????
I have written a more detailed analysis of the statute if anyone would like to pursue this. I think that it is imperative that we nail this down. Actually, I really would like for someone to tell me where I've missed the boat so that I can advise clients to purchase a SPIA without needing to name the state as a beneficiary.
Vasiliadis [6/16/06]: I do not agree with Pat's conclusion that annuities meeting the provisions of 42 USC 1396p(c)(1)(G) must name the State as beneficiary.
I do agree with Pat's analysis up until the last two paragraphs [of her detailed analysis]. 6012(a), which creates new 42 USC 1396p(e), does not create a blanket mandate that all annuities owned by an applicant must name the State as preferred beneficiary. Rather, it limits that requirement to annuities that are covered under newly created 42 USC 1396p(c)(1)(F) and is not applicable to annuities created under (G). The operative language in 6012(a) reads: "...under paragraph (2) [THE PROVISION OF DRA ESTABLISHING 42 USC 1396p(c)(1)(F)] the State becomes a remainder beneficiary..."
Annuities that meet the requirements of 6012(c), which creates new 42 USC 1396p(c)(1)(G), do not get penalized under (F). They are an exception to the general transfer penalty rule imposed by (F). The 6012(a) requirement only applies to annuities covered by the general penalty rule.
I interpret new 42 USC 1396p(e)(4), which reserves to States the right to deny eligibility "based on income or resources derived from an annuity," to refer to the situation of an annuity that does not incur a transfer penalty but otherwise prevents eligibility because:
- the income derived therefrom pushes the applicant over his income cap imposed in income cap states or in home and community based (waiver) programs; or
- the annuity is assignable or the beneficiary designation can be changed.
I do not read 1396p(e)(4) as giving the States new authority, beyond what they already had, to declare annuities as assets -- EXCEPT for the assignability/beneficiary designation.
Sitchler [6/19/06]: Look at the new 42 USC 1396p(e), inserted right after the SNT portion of the Medicaid statute. This new subsection (e) specifically addresses annuities, states:
"the application or recertification shall disclose a description of any interest the individual or community spouse has in an annuity REGARDLESS OF WHETHER THE ANNUITY IS IRREVOCABLE OR IS TREATED AS AN ASSET." [emphasis added]
Then the statute goes on to require a notice in each application and re-certification form:
That notice is that "such annuities" -- and what are "such annuities"? The ones just described: "regardless of whether the annuity is irrevocable or is treated as an asset." Those "such annuities" shall include a statement that implements the requirements of 42 USC 1396p(c)(1)(F) [that's the subsection 2]
In that subsection 2: the state must be secondary beneficiary if there is a spouse, etc., or primary beneficiary if there is no spouse named as primary.
The notice should also include that not only do you have to name the state as a beneficiary, but purchasing an annuity will carry a transfer-of-asset penalty unless it is annuitized from a retirement account or has equal payments over the life of the annuity.
Notwithstanding the bad language and eking out what this draftsman is saying, what Stanley Vasiliadis [and Robert Anderson] is advocating in his interpretation has a result that is indefensible in light of the legislative intent to stop "Medicaid planning."
Do you honestly think when this thing is litigated in your state (may not be able to litigate in Texas) that the legislative intent was to allow a 72-year-old terminally ill female, with high nursing home costs to buy an immediate irrevocable annuity with a 10-year level payout, name her children as remainder beneficiaries, and qualify for Medicaid immediately? She dies six months later and the children get the money?
Vasiliadis [6/20/06]: In an annuity case litigated in PA, Mertz v Houstoun, 155 F. Supp. 2d 415 (E.D. Pa. 2001), my case, the court upheld the sheltering of an unlimited amount of excess resources for the benefit of a CS [community spouse], and observed:
"In short, a couple may effectively convert countable resources into income of the community spouse which is not countable in determining Medicaid eligibility for the institutionalized spouse by purchasing an irrevocable actuarially sound commercial annuity for the sole benefit of the community spouse. It is a loophole apparently discerned by lawyers and exploited by issuers who advertise such annuities as a means to qualify for Medicaid benefits. The definition of a loophole, however, is an 'ambiguity, omission or exception that provides a way to avoid a rule without violating its literal requirements.' See Black's Law Dictionary 954 (7th ed. 1999) (noting as example statutory provision that permits one to "legally avoid" taxes).
"The practice is inconsistent with an apparent purpose of the MCCA and indeed the whole thrust of the Medicaid program which is to provide assistance to those truly in need. It has no doubt frustrated not only the DPW but also program administrators in other states."
Some courts actually follow what the law says, as did the one above. Some courts don't. Section 6012 (a) of the DRA, in my opinion, unambiguously limits the requirement that the State be named as preferred beneficiary to those annuities that are covered by the general annuity penalty rule in (F). (G) is an exception to that rule. It is not readily apparent to me that the framers of the DRA intended safe harbor annuities under (G) to pay remaining payments to the State. The framers of (G) apparently assumed that since the annuity is actuarially sound and must pay out to the Medicaid recipient, there was no need to incorporate the State-as-beneficiary requirement. In any event, since the specific provision in 1396p(e) limiting the State-as-beneficiary requirement to annuities under (F) is unambiguous, there is no need to look to the intent of the framers. At best, you have identified a "loophole," like the one in Mertz.
Anderson [6/21/06]: I cannot agree with Patricia's analysis, which runs counter to NAELA's task force, Dale Krause, and my NAELA News article, which comes out next week.
Here's where Patricia's analysis fails. First, the 'notice' provision to which she refers comes from purely 'procedural' provisions, not from (F) and (G), which are the 'substantive' provisions of the DRA's annuity rules. Second, the procedural reference in 42 USC 1396p(e) to (F) of 42 USC 1396p(c)(1) 'which implements (F)' only applies to those annuities that fall within (F). The annuities falling within (G) do not fall in (F), and therefore they need not name the State as beneficiary.
Sitchler [6/21/06]: Colleagues: While I know that my interpretation is counter to that of the establishment (NAELA) and the annuity industry (Dale Krause) and Bob's interpretation, I still believe that they're missin' the fork in the road.
First, Bob's responses in his email only draw conclusions. The response doesn't address the plain text of the law that I raised.
Second, I wasn't kidding about legislative history. I have not seen any analysis of the 1,079-page legislative history contained in the House Report from the Committee on the Budget, which includes the Medicaid Asset Transfers and Estate Planning Testimony before the Senate Committee on Finance. The legislative report acknowledges that there are 'professional 'Medicaid planners' who assist seniors, often at the behest of adult children, with such 'Medicaid estate planning' or 'Medicaid planning' activities. A myriad of legal maneuvers and financial instruments, including large dollar annuities, are employed in this endeavor.' The report touts the savings arising from the proposed changes in the law by noting 'according to the Congressional Research Service, 'even if only a fraction of spending were saved, it could be millions or possibly billions of dollars.' '
The extensive house report goes on to describe the current laws that allow the purchase of an annuity in relation to Medicaid eligibility and then describes the purpose of the new statute that will require the reimbursement of the state for Medicaid expenditures. I truly believe that the extensive legislative history supports my interpretation of the law.
My fear is that NAELA will publish 'permission to buy annuities without naming the state as a beneficiary' and attorneys will unquestioningly rely on NAELA's interpretation of the law. Then, if my interpretation turns out to be the actual intent and reading of the statute, attorneys will, at a minimum, have a lot of unhappy clients when they must include the state as a beneficiary on an irrevocable annuity.
I'm not against using annuities as a method of spending down. But I intend to inform my clients that they would need to name the state as the appropriate beneficiary and then suggest that they avoid dying during the annuity period (Dale: are we going to have 22-month annuities?).
While I believe that my argument is the true meaning of the law, one must admit that the ultimate interpretation is controversial. I strongly suggest that NAELA qualify any publication with a notation that their interpretation has been questioned and suggest that all attorneys should read the article carefully taking into consideration that the law is unsettled. Even better, I would suggest that the best course of action would be to have a point- counterpoint.
Resources
NAELA members can read the NAELA analysis at: https://www.naela.com/private/OurGov/PDF/DRA_2005.pdf.
Click here to see the relevant parts of the federal Medicaid statute, 42 U.S.C. § 1396p and § 1396r, integrating changes made by the Deficit Reduction Act of 2005 (DRA, including the annuity provisions at issue.
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