The use of Medicaid annuities as planning device has been a hotbed of litigation since the passage of the Deficit Reduction Act of 2005 (DRA). The Pennsylvania Department of Human Services (DHS) has routinely found itself on the losing end of this ongoing battle. In the case of Zahner v. Secretary Pennsylvania Department of Human Services, the United States Court Of Appeals for the Third Circuit addressed the use of short-term annuities as a Medicaid planning device, issuing another decision favoring Medical Assistance (MA) beneficiaries. The Zahner decision has significant implications for the provider community.
Zahner involved two plaintiffs who purchased short-term annuities. Donna Claypool and her husband made gifts of $100,000.00 prior to admission to a nursing facility. Approximately eight months after admission, Mrs. Claypool purchased an annuity in the amount of $84,874.08 in exchange for monthly payments of $6,100.22 for 14 months. A second plaintiff, Connie Sanner, had given money to her children, then purchased an annuity of $53,700.00 which paid $4,499.17 per month over 12 months. In both cases, the annuities were intended to pay for nursing facility care during the period of ineligibility that resulted from the gifts made by each of the residents. In both cases, the annuity was far shorter than the life expectancy of each resident.
DHS argued, among other things, that the short-term annuities were shams. In one case, when fees were factored in, the cost of the annuity was higher than the aggregate payouts. However, the Third Circuit found that the annuities met the safe harbor criteria set forth in the DRA, and therefore must be treated as income, not as a resource available to pay for the resident's care.
As many will recall, Congress intended the passage of the DRA to curb certain Medicaid planning strategies such as "half-a-loaf" gifting. Ironically, the DRA annuity provisions have now given rise to a different means to implement a half-a-loaf strategy. If an individual or couple has sufficient resources, they can gift a portion of their resources, then purchase an annuity to pay for the nursing home costs during the resulting penalty period. Zahner explicitly allows short-term annuities to be used in this manner.
If you have any questions regarding Medical Assistance eligibility, collections, or guardianships, please do not hesitate to contact Steven M. Montresor.