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Spouse Annuities

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An Example of a DRA Compliant Annuity for a Single Person

 

Many attorneys are concerned that the gift and annuity technique may be eliminated as a planning option in light of the Federal District Court decision of Zahner v. Mackereth (2014).   In that decision, the Court ruled that short term annuities used in gift and annuity planning would be considered disqualifying transfers of resources in light of their short term and the failure of some of these annuities to provide a return on the investment.

 

Consequently, attorneys are looking for a simple and relatively risk free alternative to gift and annuity planning for single applicants.  The traditional Deficit Reduction Act compliant annuity for a single person provides a reasonable planning option for single applicants for Medicaid.

 

This DRA Annuity plan involves two premises: 

 

   1) More and more admissions to nursing homes are done at a time when the applicant is frail and has a life expectancy of less than a year. Take a look at the study published by the American Geriatrics Society that supports this premise.; and 

 

   2) Since the financial crisis of 2008, there has been an increase in the difference between the Medicaid reimbursement rate paid to nursing homes and the private pay rate charged to those not on Medicaid.  Take a look at Pennsylvania Department of Public Welfare’s Medicaid reimbursement rates for nursing homes to see how they differ from your facility’s private pay figures. 

 

With these two premises in mind, it makes sense to get your client on Medicaid as soon as possible.  By qualifying for Medicaid, your client begins paying the Medicaid rate each month.  The savings is the difference between the Medicaid rate and the private pay rate.  A typical savings is $2500 per month.   In some cases, the savings is close to $5000 per month. 

 

Here’s an example of how this plan works.   Let’s say you have a single client with $100,000 in available resources and the following facts:

 

   The nursing home charges a private pay rate of $335/day,

 

   However, that facility’s Medicaid reimbursement rate is $187/day

 

   Over the course of a 30 day month

 

         $335 x 30 = $10,050 private pay rate

 

         $178 x 30 = $5,340 Medicaid rate

 

The plan is to annuitize the $100,000 of available resources and immediately qualifying your client for Medicaid.  Your client then “pays” the lower Medicaid rate. 

 

         $10,050  - $5340 = $4710 per month savings

 

That’s a savings of $56,520 in a year!  Of course, if your client stays in the nursing home for an extended period of time, all of the annuity would be consumed by the cost of your client’s care.  With $100,000 in excess resources, your client will consume all of the funds in about 18 months ($100,000/$5340).   However, if you believe premise #1 above - that most nursing home admissions will not survive for an extended period of time – then this plan will more than likely provide benefit to your clients.

 

Remember to make sure the monthly payment from the annuity, when combined with other income sources, does not exceed the Medicaid reimbursement rate of your facility  (That is the $5340 in my example above).  The facility can only charge the Medicaid reimbursement rate for your client’s room and board (additional medical expenses are charged separately).   If your client’s sources of income plus the annuity payments (the patient pay obligation) does not pay the $5340 in full, there may be a claim by the Department of Public Welfare on the balance in the annuity at your client’s death. 42 U.S.C. § 1396p(c)(1)(F).

 

The Zahner case was concerned with annuities used to pay through a penalty period caused by a gift.  The term of these traditional DRA annuities are not going to be the short term annuities used in Zahner.  These annuities should be for a reasonable term within the life expectancy of the annuitant and name the state as the primary beneficiary behind a disabled or minor child.   I would avoid buying annuities that do not return the client’s investment.

 

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