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Annuities and Notes Compared
By: Jeffrey A. Marshall, CELA*

The recent court decisions in James v. Richman and Weatherbee v. Richman have made it clear that a DRA compliant annuity can be purchased to convert the otherwise excess resources of a community spouse to non-countable income. This can result in immediate Medicaid qualification for the institutionalized spouse.

The DRA also appears to create a limited "safe harbor" for the use of loans in Medicaid planning. Transfers of cash or other assets from a community spouse to children in exchange for a DRA compliant promissory note would appear to be exempt from Medicaid transfer of asset penalties [see 42 U.S.C. §1396p(c)(1)(I)].

DRA compliant loans can function in a manner similar to DRA annuities. The planner may need to choose between these two optional methods of protecting the resources of the community spouse. This article is intended to provide the elder law attorney with a brief comparison of these two planning tools.

The DRA added the following section to the transfer of asset rules:
For purposes of this paragraph with respect to a transfer of assets, the term "assets" includes funds used to purchase a promissory note, loan, or mortgage unless such note, loan, or mortgage--

(i) has a repayment term that is actuarially sound (as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration);
(ii) provides for payments to be made in equal amounts during the term of the loan, with no deferral and no balloon payments made; and
(iii) prohibits the cancellation of the balance upon the death of the lender.
In the case of a promissory note, loan, or mortgage that does not satisfy the requirements of clauses (i) through (iii), the value of such note, loan, or mortgage shall be the outstanding balance due as of the date of the individual's application for medical assistance for services described in subparagraph (C).

Thus a note transaction that complies with the DRA should not be treated as a penalty inducing transfer. Whether the note can nevertheless be treated as a resource is less clear. DPW’s Operations Memoranda on notes states that even if "the instrument meets all the requirements above [i.e. DRA compliance], the CAO must also then consider whether the promissory note, loan, or mortgage is an available resource." This DPW policy guidance has not yet been tested in any reported Pennsylvania court decisions.

Because notes and annuities offer similar paths to protecting the excess resources of a community spouse, planners may have to choose between them. The factors to be evaluated in making this choice are both subtle and complicated. There are a number of perceived advantages to annuities:

Unlike notes, the use of annuities is supported by well established case law in Pennsylvania. Their use involves less risk of denial of benefits by DPW.
Commercial annuities offer better certainty that payments will actually be made to the Community Spouse.

Commercial annuities provide some return on investment while a note merely shifts between family members.
The children are disadvantaged by having to make interest payments to the Community Spouse.

Notes carry the risk of being subject to negative events in the child/borrower's life such as death or financial problems.
However, notes have some perceived advantages as well:

Notes may offer flexibility that is not available with commercial annuities. They can be very short term. And, although notes must provide for payments to be made in equal amounts, some planners believe that pre-payments may be made by the borrower.

Unlike annuities, there is no requirement that DRA notes include DPW as a remainderman. This repayment obligation can arise if the Community Spouse predeceases the Institutionalized Spouse while annuity payments are still due. (However, this perceived advantage of the note over the annuity is negated to some extent since the balance due on the note will be included in the estate of the Community Spouse where it will be subject to elective share claims of the Institutional Spouse).

With a note the entire transaction remains within the family. Planners may be more familiar with structuring Medicaid planning transactions between family members and wish to avoid involving an insurance company.

Attorney Marshall can be contacted at webmail@paelderlaw.com or at 1-800-401-4552. More information about Attorney Marshall is available at www.paelderlaw.com/staff.html



Don't Miss Upcoming CLE Presentations on Medicaid Annuities

PBI Estate & Elder Law Symposium
Practical Calculations for Using Annuities & Notes in Medicaid Planning
Wednesday, February 17, 2010
Mechanicsburg, PBI Conference Center
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Attorney Parker will serve on the faculty at February’s PBI Estate & Elder Symposium. He will present an updated version of his Elder Law Institute Session, Practical Calculations for Using Annuities & Notes in Medicaid Planning

Montgomery County Elder Law Committee Meeting
March 23, 2010 12:00 PM- 2:00 PM, Philadelphia Bar Association Building, Philadelphia
Attorney Parker will update members of the Philadelphia Bar Association about using Medicaid Annuities in their practice.

Philadelphia County Elder Law Committee Meeting
April 29, 2010 12:00 PM- 2:00 PM, Philadelphia Bar Association Building, Philadelphia
Attorney Parker will update members of the Philadelphia Bar Association about using Medicaid Annuities in their practice.



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