Number One Provider of Medicaid Compliant Annuities

Wisconsin - Implementation of DRA

In an Operations Memo dated January 7, 2009, Amy Mendel-Clemens, of the Division of Health Care Access and Accountability, discussed the implementation of the Deficit Reduction Act of 2005 ("DRA") rules as to Wisconsin.

As we all know, the DRA made major changes to the Medicaid divestment laws.  These changes included a new divestment penalty period begin date, a longer look back period, new treatment options for multiple divestments, a requirement that penalty periods include partial months, and the mandate that certain types of asset transfers be considered divestments.  Under the DRA, these changes apply primarily to divestments that occur on or after February 8, 2006.

As to Wisconsin, after the federal government implemented the DRA rules, the legal counsel for the Wisconsin Department of Health and Family Services determined that the federal DRA provisions could not be implemented in Wisconsin until the state law was changed.  As a result, the DRA provisions were included in Wisconsin Act 20, which was enacted on October 26, 2007.

Even though the Operations Memo dealt with all of the provisions related to DRA, this blog has been designed only to address the issues related to Medicaid Compliant Annuities.  As to annuities, annuities purchased on or after January 1, 2009, must name the Wisconsin Department of Health Services Estate Recovery Program as a remainder beneficiary.  The requirement to name the state as a remainder beneficiary also applies to annuities purchased prior to January 1, 2009, if certain transactions involving the annuity were made by the individual or spouse on or after January 1, 2009.  This requirement applies to all annuities, regardless of whether they are considered revocable or not.  An annuity must name the Wisconsin Department of Health Services Estate Recovery Program as the remainder beneficiary in the first position for the total amount of medical assistance paid on behalf of the institutionalized individual, unless there is a community spouse and/or a minor or disabled child.

In addition to naming the state as the remainder beneficiary, in order for an annuity purchased after January 1, 2009, to not be treated as a divestment the following conditions must be met:

• The annuity must be irrevocable and non-assignable.
• The annuity must be actuarially sound, in accordance with the life expectancy tables published by the Chief Actuary of the Social Security Administration.
• The annuity must provide payments in approximately equal amounts, with no deferred or balloon payments.

To read the complete Operations Memo that was released on January 7, 2009, please click here.

DRA - Expansion of Long-Term Care Partnership Programs

Prior to the Deficit Reduction Act of 2005 ("DRA '05), only four states, including: California, Connecticut, Indiana, and New York, had Long-Term Care Partnership Programs ("LTC Partnership Programs).  As a result of DRA '05, the Long-Term Care Partnership Programs were expanded to the remaining states.  

The purpose of the LTC Partnership Programs is to develop creative solutions for long-term care financing.  The LTC Partnership Programs combine the use of approved private LTC insurance plans with access to Medicaid benefits.  In other words, once the insured has exhausted the benefits of his or her Partnership LTC Policy, Medicaid benefits become available to the insured.  Two Partnership LTC Policy models were initially developed, including a total asset protection model, and a dollar-for-dollar asset protection model.

New York was the first to adopt the total asset model, while the other three states implemented the dollar-for-dollar model.  The difference between the two models is how countable resources are protected from a Medicaid spend-down.  With the total asset model, all countable resources are protected from a Medicaid spend-down, while in the dollar-for-dollar model, only the value of countable resources equal to the Partnership LTC benefit pool are protected from a Medicaid spend-down.  In other words, if the Partnership LTC policy created a benefit pool of $400,000.00, then countable resources of $400,000.00 are protected from a Medicaid spend-down.   

In both models, the individual must still pass the Medicaid income eligibility test, after exhausting his or her Partnership LTC policy benefits.  In other words, if an individual's monthly income from all sources exceeds the private pay rate for the nursing home facility in which he or she resides, Medicaid benefits will not be available to the individual.  Additionally, any monthly income in the individual's name must be contributed toward his or her care, less a small amount for his or her personal needs.

Of the four original partnership states, only New York and Indiana still offer a total asset model.  Additionally, as of this writing, the following states offer the dollar-for-dollar LTC Partnership Program: Colorado, Florida, Georgia, Idaho, Kansas, Minnesota, Missouri, Nebraska, North Dakota, Ohio, Oregon, Pennsylvania, South Dakota, and Virginia.  It is expected that none of the aforementioned states will offer a total asset protection LTC Partnership Plan.  

Agents are required to discuss the Partnership Plans, where available, and must complete special training requirements as dictated by their state.  Krause Financial Services offers Partnership LTC Plans, as well as traditional Long-Term Care Insurance Plans throughout the United States. 

Wisconsin NAELA Chapter UnProgram

I facilitated a discussion at the first ever Wisconsin NAELA Chapter UnProgram on June 13, 2008, in Green Bay, Wisconsin on the subject of DRA.  Four of the topics discussed are outlined below:

1.                  Medicaid Complaint Annuities – Community Spouse

In those states that have already passed the DRA legislation, in the majority of the states it is clear that if the community spouse purchases a Medicaid Complaint Annuity (“MCA”) with the spend-down amount, it is required that the primary beneficiary designation of the MCA must read as follows: “The State Medicaid Program is the primary beneficiary to the extent that the institutionalized spouse, namely ______, received Medicaid benefits.”  In light of these facts, the following question was asked, “If the community spouse dies prior to collecting all of the monthly payments from his or her MCA, what happens to the balance of the monthly payments?”

At the community spouse’s death, the claim amount to the State Medicaid program is frozen.  At that point, a letter is directed to the State Medicaid program to determine what amount is owed for the past Medicaid benefits.  The Medicaid benefits claim amount will include room and board costs, as well as pharmacy.  Depending on the total amount due, the total value of the remaining monthly payments in the MCA, and whether the MCA included a cash commutation feature[1], the results of the each case could be drastically different.  If the claim amount exceeds the value of the remaining monthly payments, and there is no cash commutation option available, the elder law attorney will want to negotiate a settlement.  In the alternative, assuming the claim amount does not exceed the remaining monthly payments, the elder law attorney is still encouraged to try to negotiate a settlement. 

2.                  Medicaid Compliant Annuities vs. Promissory Notes

Again, in those states that have already passed the DRA legislation, it is clear that MCA’s are required to name the State Medicaid program as the primary beneficiary to the extent that the institutionalized person received Medicaid benefits.  With Promissory Notes, in that they do not bear beneficiary designations, and they cannot be self-canceling (“SCIN”), it is clear that at the death of the Medicaid recipient, the State Medicaid program could pursue any monthly payments remaining in the Promissory Note.  Within the group, the following question was asked, “Is it better to use a Promissory Note versus an MCA?”  It is clear that the MCA, because of its beneficiary designation, which favors the State Medicaid program, offers the elder law attorney a timely closure of the respective file.  In the alternative, in that the State Medicaid program could pursue the Obligors under the Promissory Note for the balance of the monthly payments, the Promissory Note avenue leaves an open liability, which could exist for many years. 

3.                  Reverse Half-a-Loaf vs. Gifting/Short-Term MCA Plans

Within the group, the following question was asked,”Does the Reverse Half-a-Loaf Plan offer more opportunity than a Gifting/Short-Term MCA Plan?”

With the Reverse Half-a-Loaf Plan, the potential Medicaid recipient would give away all of the spend-down amount, and would immediately apply for Medicaid benefits.  The divestment penalty period associated to the transfer would be prescribed – 10 months.  Assuming the Medicaid recipient retained $2,000.00, or less, a pre-paid funeral arrangement, and personal property, he or she would be otherwise eligible, except for the 10 month divestment penalty period.  Over the course of the next 5 months, the Medicaid applicant’s children – the Giftees, would assist the Medicaid applicant in paying any outstanding nursing home bills.  At the end of the 5 month period, with a partial cure having taken place, the Medicaid applicant would ask to have the original 10 month divestment transfer penalty reduced to 5 months – based on the gift amounts that were indirectly returned to the Medicaid applicant by way of the payments made to the nursing home.  If all works as planned, the Medicaid applicant would receive the proposed adjustment, and would be economically eligible for Medicaid benefits in month 6. 

Nationally, in many states are now disallowing partial cures, the aforementioned individual would not be eligible for Medicaid benefits in month 6.  At the same time, the Medicaid applicant would be deemed not “otherwise eligible” in that the returned monthly gift amounts would put him or her over the resource allowance - $2,000.00. 

With the Gifting/Short-Term MCA Plan, the Medicaid applicant would not give away all of the spend-down amount.  Instead, the Medicaid applicant would gift away approximately ½ of the spend-down amount, and would use the other half to purchase a MCA.  If the math is correctly done, the Medicaid applicant would be economically eligible to go on Medicaid benefits at the beginning of month 6.  Additionally, with the case not involving a partial cure, it appears that the Gifting/Short-Term MCA Plan offers a more reliable Medicaid opportunity. 

4.                  Long-Term Care Insurance

Within the group, the following question was asked, ”Is it possible to buy a long-term care insurance plan which can be paid up with a single payment, and allows for a total return of premium if the insured does not utilize any of the LTCI benefits?”  The answer was yes, in that one insurance company now offers such a plan. 

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[1]This option allows the beneficiaries to close out the remaining monthly payments with a lump sum cash payment.

Where have all the Long-Term Medicaid Compliant Annuities Gone?

With the passing of the Deficit Reduction Act of 2005 ("DRA"), in order for an annuity to be considered "Medicaid Compliant", the annuity must be irrevocable, non-assignable, actuarially sound, provide for equal payments, and name the State as the primary beneficiary to the extent of Medicaid benefits provided to the institutionalized individual.

In the case of an individual, I have found that a Stand Alone Medicaid Compliant Annuity ("MCA") may not offer an economic advantage to the individual, or his or her family, except to immediately qualify the individual for LTC Medicaid benefits.  If the individual lives long enough, any monthly payments remaining in the MCA would accrue to the benefit of the State Medicaid Program.  This would not be the desired result for most families.  In those cases, where the Medicaid applicant's actual life expectancy is short in light of his or her Medicaid life expectancy - terminal illness, a Long-Term MCA provides an excellent result in that the individual will immediately qualify for LTC Medicaid benefits, and after the re-payment to the State Medicaid Program, will allow for a residual benefit to his or her immediate family.   

In the case of a husband and wife, I have found that a Stand Alone MCA in favor of the community spouse offers the best economic result, in immediately qualifying the institutionalized spouse for LTC Medicaid benefits.  However, one question is always posed in these cases.  If the community spouse predeceases the term of the MCA, doesn't the State Medicaid Program have the right to seek a reimbursement for any Medicaid expenses paid on behalf of the institutionalized spouse?  The answer is, "yes."  In light of this answer, most community spouses fear that they will not survive their Medicaid life expectancy, and thus opt for a shorter term - 24 to 36 months.  Is this a good result?  From my standpoint, in that I earn my living from commissions, and commissions are higher for longer term MCA's, my answer is "no."  However, in order to satisfy the expectations of all the parties involved, it is my opinion that an MCA can have a shorter term, but the total income to be received by the community spouse, including that from the MCA, should be reasonable.  In other words, the term of the MCA, and the anticipated monthly payment, should be reasonable in light of the circumstances.  I do not want a community spouse to have total monthly income of $25,000.00, when their monthly income need is only $9,500.00.   

Highlights of the Deficit Reduction Act of 2005

The Deficit Reduction Act of 2005 ("DRA") was signed into law on February 8, 2006.  It is important to note that all transactions prior to February 8, 2006, will be grandfathered and processed under the old laws.  It is my opinion that the most significant part of DRA relates to gifting.  In light of DRA, and the limitations imposed by it, it is now more important than ever that individuals consider purchasing Long-Term Care ("LTC") Insurance as a means to protect all of their assets for their heirs.   

The 10 highlights of DRA are as follows:

The Look-Back period for gifts and transfers has been changed from 36 months to 60 months.  The look-back period starts from the date of the Medicaid application. 

The Divestment Penalty Start Date will begin to run at the point where the individual is otherwise eligible for Medicaid benefits.  Under the old rule, the divestment penalty period began to run in the month that the gift was made. 

The Income First Rule requires that the community spouse must first consider the income earned by the institutionalized spouse, before requesting a fair hearing to increase the CSRA amount.      

The Homes Equity Limitation states that an individual may not qualify for Medicaid benefits if his or her residence has a value greater than $500,000.00.  In some jurisdictions, the limitation has been raised to $750,000.00. 

The Rounding Down concept for gifts has been eliminated.  Under the old rule, if an individual gave away a gift which created a 1.999 month divestment penalty period, the actual penalty would be limited to 1 month.  Under the new rule, the actual divestment penalty period will be totally imposed.   

The Aggregate Gift Rule requires that all gifts made during the look-back period must be added together for purposes of calculating the actual divestment penalty period. 

The Promissory Note Rules state that a promissory note must be actuarially sound, irrevocable, non-assignable, and have no value on the secondary market.  DRA also eliminated the use of Self-Canceling Installment Notes ("SCIN"). 

The Life Estate Rule requires that if an individual purchases a life estate in a child's home, the individual must actually live in the home for a minimum period of 1 year.  If the individual fails to meet the required time element, the purchase of the life estate will be treated as an improper transfer, and subject to a divestment penalty period. 

The Hardship Waivers that were previously granted under the old rule will be more difficult to obtain under DRA.

The Annuity Rules state that an annuity must be actuarially sound, irrevocable, non-assignable, and have no value on the secondary market.  For a single person, the state must be named as the primary beneficiary, to the extent that Medicaid benefits were paid to the individual.  Additionally, should any funds remain in the annuity, they will go to the individual's heirs.  For a married couple, the spouse, minor, or disabled child can be named as the primary beneficiary.  Additionally, the sate must be named as the contingent beneficiary.