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Federal Court Confirms Use of Annuities in Medicaid Planning

Medicaid is a joint federal and state program that provides needed health care coverage for many americans, including those requiring long term care. Since Medicaid is a means-based program, individuals often need to spend down their assets in order to qualify for Medicaid. One way to accomplish this is through the purchase of short term annuities to reduce available assets for purposes of Medicaid. In Zahner v. Secretary, Pennsylvania Department of Human Services, the United States Court of Appeals (3rd Circuit) heard appeals from two individuals that applied for Medicaid, but were denied the advantage of using annuities to reduce their countable assets for purposes of eligibility. While the case arises out of Pennsylvania, it is instructive for those seeking Medicaid coverage in the State of New York, as well as other states.


Facts of the Case


In Zahner, two Medicaid applicants each made substantial gifts to family members leading up to their application and need for Medicaid institutional care, which lead to a period of ineligibility. To help cover the cost of their nursing facilities during the period of ineligibility the appellants purchased a short-term annuity. One applicant paid approximately $84,000 to receive approximately $6,000 over a 14 month period, and the other paid approximately $53,000 to receive approximately $4,500 over a 12 month period. Each annuitant paid $1,000 to set up the annuity. When including fees, the cost of the annuity exceed the return on both annuities. The state’s department of human services determined that the transactions were not annuities and counted the transaction as a resource for purposes of their application, thereby re-calculating the period of ineligibility for Medicaid institutional care.The Medicaid applicants sued, and the district court found that the annuities were sham transactions set up to shield assets for purposes of Medicaid eligibility. On appeal the 3rd Circuit considered whether the purchase of the annuities qualified for the safe harbor by which certain annuities are excluded as an available resource for purposes of Medicaid eligibility.


Medicaid Safe Harbor for Annuities


The 3rd Circuit overturned the district court’s decision, noting that individuals often purchase short term annuities to reduce their available assets for purposes of Medicaid eligibility. Moreover, under federal law (42 U.S.C. § 1396p(c)(1)(F), (G)(ii)) an annuity is not counted as a resource for purposes of Medicaid if the annuity:


  • provides that the state will receive any remainder amount due under the annuity;
  • is irrevocable and non-assignable;
  • is calculated in accordance with sound actuarial principles; and
  • provides equal payments over the life of the annuity.


The 3rd Circuit held that in enacting the safe harbor, Congress did not require an annuity to have a minimum term. Further, applicable law and regulations do not require that an annuity have a positive rate of return in order to qualify for the safe harbor, as long as they are actuarially sound. The Court concluded that an annuity is actuarially sound if the term of the annuity is less than the annuitant’s reasonable life expectancy. As a result, the annuities in Zahner were not countable assets for purposes of Medicaid eligibility. The court’s decision in Zahner, provides needed certainty for elder law attorneys and those planning for Medicaid eligibility.

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