On October 2, 2012, the United States Court of Appeals for the Second Circuit decided a case involving non-assignable annuities in the context of the Medicaid Act.  The case is entitled Lopes v. Starkowski.

In my opinion, this case puts to bed an issue that has been litigated in several different states and decided by several different federal appeals courts.  Every federal appeals court that has decided the issue has come down in favor of the Medicaid applicant.  There are no conflicting decisions and since four or five federal appeals courts have ruled on the issue, I think the issue is now resolved.

Essentially, the issue is this:  Is an irrevocable, non-assignable annuity an income item or a resource item?  The issue is very important, and I will demonstrate why in the context of a hypothetical.

Assume that Mr. and Mrs. Smith are married.  Assume that Mr. Smith resides in a nursing home and will continue to reside in the nursing home for the remainder of his life.  Assume that Mr. Smith has pension and Social Security income of $3,500 a month.  Assume that Mrs. Smith has Social Security income of $500 a month.  Assume further that Mr. and Mrs. Smith own a home and $400,000 in bank accounts.

Medicaid would tell Mrs. Smith that she can retain the home and approximately $113,000 of their cash assets.  The remaining assets must be used to pay for Mr. Smith’s care in the nursing home before he will qualify for Medicaid, according to the Medicaid office.

Assume Mrs. Smith comes to me for advice.  I advise her to set up a Medicaid-complaint annuity, which, among other things, is irrevocable and non-assignable with all of her cash assets above $113,000.  So, Mrs. Smith, being intelligent, takes my advice and purchases such an annuity for $287,000.

The next month, Mr. Smith qualifies for Medicaid because by purchasing the annuity, Mrs. Smith converted the $287,000 in excess assets into a stream of income that belongs only to her.  Mr. Smith no longer has too many assets to qualify for Medicaid.  Mrs. Smith now has sufficient income to live.

States, obviously, hate that I can do this for Mrs. Smith, but the Lopes case and several other federal appeals court cases say I can do this for her.  This case is a big win for the elderly and disabled.

Annuities can play an important role in Medicaid planning, and recent developments make them even more useful. Understanding these changes helps you plan strategically and protect your assets.

Changes in how annuities are treated can create new opportunities, but they also require careful interpretation. Medicaid rules are highly specific, and even small shifts can affect how assets are counted or recovered later.