ANNUITIES: SELLING A STREAM OF PAYMENTS

In the past, elder law attorneys would advise their clients to purchase an annuity in order to facilitate Medicaid eligibility. The purchase of an annuity was a very common technique when planning for a married couple.

The laws governing the Medicaid program permit the spouse who is not receiving Medicaid benefits, called the “community spouse,” to retain a certain amount of “countable resources.” “Countable resources” are cash and cash equivalent assets, for example, bank accounts, stocks, bonds, annuities. Currently, the maximum amount of countable resources that a community spouse can retain is $92,760.

But what if a couple has $200,000 worth of countable resources? That’s roughly $107,000 too much in countable resources to permit the spouse who requires long-term care to qualify for Medicaid. Without planning, the couple would need to “spend-down” the excess $107,000 before the spouse in the nursing home would qualify for Medicaid.

Not surprisingly, many couples are reluctant to spend more than one-half of their net worth on a nursing home before Medicaid will assist them with their care.

Today, there are a number of techniques that the community spouse could employ to save most, if not all, of that $107,000 in excess countable resources; however, in the past, there was one additional technique that the community spouse could employ to aid him in qualifying his spouse for Medicaid eligibility – the purchase of an annuity.

Here’s how it would work: Assume that you’re a couple with $107,000 in excess resources. The community spouse would purchase an annuity for $107,000 in his name. An annuity is an investment device. The annuity will return to the community spouse his $107,000 in initial investment plus a given interest rate, say 4%.

If the annuity is irrevocable, meaning that the terms of the annuity cannot be altered, and non-assignable, meaning that the annuity cannot be given to another person, then the annuity payouts will be treated as a stream of income, not an asset. In other words, the community spouse will have effectively converted the $107,000 in excess resources to a stream of income that belongs to him, not the spouse in the nursing home who is hoping to qualify for Medicaid benefits.

In 1999, New Jersey began taking a very harsh view of this planning technique. In essence, the New Jersey rule, as it exists today, holds that an annuity remains a countable resource to the extent that it exceeds the countable resources that the community spouse can retain, that is, the $92,760 maximum.

There have been a number of on-going challenges against New Jersey’s position on this issue, and as those challenges have become more cogent, New Jersey has shifted its argument.

The State’s current position on annuities is that annuities are available resources because the annuity owner, that is, the community spouse, could sell the steam of annuity payments on a secondary market. The State is contending that the owner of an annuity could find a company or person who would be willing to buy the stream of payments for a discounted price.

For instance, if the community spouse could expect to receive $10,000 a year for the next ten years from the annuity, or $100,000 in payments, the State argues that the community spouse might be able to find someone who would purchase that $100,000 in anticipated payments for $60,000. Since the annuity, or some derivative of the annuity, could be sold, the annuity is available, at least as far as the State is concerned.

What do I think of the State’s argument? I think that if the payments could be sold on a secondary market then the annuity would be available. The value of the asset, for purposes of Medicaid, would be the value that the community spouse could expect to receive for his stream of payments, that is, $60,000.

The real question is, is the stream of payments from a Medicaid-type annuity saleable, or is this simply a red herring that the State is raising in the hopes of throwing heat off legitimate arguments about the availability of annuities? Probably the latter.

It’s very difficult to prove a negative, for instance, that the stream of payments is not saleable. But Courts in other states that have decided this issue seem to be placing the burden on the community spouse to prove that the stream of payments is not saleable, without placing any burden on the State to prove that a market for the payments even exists.

That’s simply incorrect. If the State makes an argument, it should bear some burden in proving its contention.