Annuity Ownership and Medicaid Qualification

By October 24, 2016Uncategorized

How does the State of Rhode Island address owning an Annuity with Medicaid qualification?

Rhode Island DHS regulations as to owning or holding an Annuity states as follows:

0382.15.35 Annuities

REV: February 2014

An annuity is an investment of funds from which an individual is paid or promised regular payments over a lifetime or a fixed period of time. Generally, an annuity is established with a lump sum of money which is paid to a bank, insurance company, or other entity.

A deferred annuity is one under which payments begin at some date to be specified in the future. Once an individual selects a periodic payment option (frequency, amount, and duration of payments), and begins to receive income, the annuity has been annuitized.

An annuity may guarantee periodic payments for a stated period (termed period certain) or guarantee periodic payments for the remainder of the life of the individual, without regard to how long the individual lives (termed life annuity).

All applicants must disclose any interest in an annuity that the applicant or his/her spouse has at the time of application and/or recertification of eligibility. Under 42 U.S.C.1396p(e), as amended by the Deficit Reduction Act, the State becomes a remainder beneficiary of all of the couples’ annuities (or other similar financial document) which were purchased or transacted by either spouse on or after February 8, 2006 by virtue of the provision of such Medicaid up to the amount of Medicaid paid on behalf of the institutionalized spouse.

Upon the determination that an applicant is eligible for benefits under LTSS-Medicaid, the Medicaid agency will notify the issuer of any annuity disclosed for purposes of section 1917(c)(1)(F) of the State’s rights as a preferred remainder beneficiary.

The Medicaid agency will additionally require the issuer of the annuity to notify the Medicaid agency regarding any changes in a disbursement of income or principal from the annuity.

When determining eligibility for Medicaid,

Count as an Available Resource:

The cash value of an annuity which can be surrendered or “cashed in.” The cash value is equal to the amount of money used to establish the annuity, plus any earnings, minus any earlier withdrawals and surrender fees. No consideration in determining cash value is given for income tax withheld or tax penalties for early withdrawal.

Annuity contracts that do not allow for cash surrender but instead allow the owner to sell the annuity on the open market are assignable. Annuity contracts that are silent regarding assignability are presumed to be assignable. Assignable annuities are countable resources. The countable value of the resource is equal to the outstanding principal balance unless the individual can furnish evidence from a reliable source which shows that the annuity is worth a lesser amount. Reliable sources include banks, other financial institutions, insurance companies, brokers, viatical settlement companies, etc.

Charming senior man and woman reading an annuity contract at their house

Reading your annuity contract is important.

Count as Available Income:

Payments made to the individual from an annuity are counted as unearned income. Any change in the income from the annuity must be reported within ten (10) days to the agency and may affect eligibility and/or post-eligibility treatment of income.

Transfer of Asset Provisions for Institutionalized Individuals May Apply When:

A non-cashable, non-assignable annuity was purchased by the individual (or by the individual’s spouse):

  • Within thirty-six (36) months (if purchased prior to February 8, 2006), or OR
  • Within sixty (60) months (if purchased or after February 8, 2006)
  • Immediately prior to, or any time after, the date the individual was both institutionalized and applied for Medicaid. See Sec. 0384.10 for a description of how the 5-year look-back on resource transfers is phased in).

In this case, a determination must be made as to whether its purchase constitutes a transfer of assets for less than fair market value.

Determine Whether Any Annuities Create a Penalty Period of Ineligibility For LTSS Medicaid

A non-cashable, non-assignable annuity purchased by the individual (or by the individual’s spouse) may be determined to be a transfer of assets for less than fair market value, and therefore create a penalty period of ineligibility.

There are two situations in which this may occur:

  1. When the asset was literally converted, within certain time frames, into an annuity which does not meet the criteria for being a “VALID TRANSFER FOR FAIR MARKET VALUE” in return (See the remainder of this Section, along with Section 0356.15.35 AND 0384.35 for detailed discussions of these topics). and/or
  2. When the annuity (if purchased on or after February 8, 2006) does not name the “State as Beneficiary” of the annuity. When such an annuity does not comply with this requirement, it is defined as being a transfer for less than fair market value.

(This requirement to name the state as beneficiary is found in Section 1917(c)(1)(F)(i) of the Social Security Act (42 U.S.C.) 1396p(c)(1)(F)(i)), as added by section 6012(b) of the Deficit Reduction Act of 2005, and as amended by the Tax Relief and Health Care Act of 2006. (See the remainder of this Section, along with Section 0356.15.35 AND 0384.35 for detailed discussions of these topics).

Time-frames for evaluating the transfer of resources DHS may “look back” at resource transfers for the 36 months, or for the 60 months, immediately prior to the date that the individual was both institutionalized, and applied for LTSS-Medicaid.

(Transfers which occurred prior to February 8, 2006 are subject to the 36 month “look back”).

(Transfers which occurred on or after February 8, 2006 are subject to the 60 month “look back”).

Additionally, transfers which occur any time after the application are also evaluated to determine whether they generated a penalty period of ineligibility for LTSS-Medicaid.

(See Section 0356.15.35 and 0384.10 and 0384.35 for detailed discussions of these topics).

To be considered a valid transfer for fair market value, an annuity must:

  • Be irrevocable and non-assignable;
  • Provide regular payments in both frequency and amount, with no deferral and no balloon payments, to or for the sole benefit of the individual; and
  • Be actuarially sound. Scheduled payments must return at least the principal within the number of years of expected life remaining for the individual.

Life expectancy tables compiled from information by the Office of the Chief Actuary of the Social Security Administration for this purpose are used to determine the number of years of expected life remaining for the individual. (See MCAR Section 0382.15.35.05).

If based on life expectancy tables compiled by the Social Security Administration’s Office of the Actuary and published by HCFA CMS, the individual is not expected to live longer than the guaranteed period of the annuity, the guaranteed period of the annuity, the annuity is not actuarially sound, and a transfer of assets for less than fair market value has taken place. The transfer is considered to have taken place at the time the annuity was purchased. The uncompensated value of the transfer is based on the amount projected to be paid beyond the individual’s reasonable life expectancy. (See Section 0384- Resource Transfers).

If an annuity is purchased or transacted on or after February 8, 2006 whether by the applicant or by their spouse, the beneficiary clause of the annuity must provide that the beneficiary of the annuity is as follows:

  • Must, except as provided in this section, name the State of Rhode Island as the remainder beneficiary in the first position for at least the amount of Medicaid paid on behalf of the institutionalized individual.
  • If however, the institutionalized individual has a minor or disabled child, such child may be named as the beneficiary in the first position, provided the State of Rhode Island is named as a beneficiary of the annuity in the second position for at least the amount of Medicaid paid on behalf of the institutionalized individual.
  • In the event such child or his or her representative disposes of any such remainder for less than fair market value, the State of Rhode Island must be named in the first position.
  • Any change in the beneficiary clause must be reported to the Medicaid agency within ten (10) days of any change and may result in a transfer of assets penalty.

An institutionalized spouse, that is, an institutionalized individual who has a community spouse:

  • Must, except as provided in this section, name the State of Rhode Island as the remainder beneficiary in the first position for at least the amount of Medicaid paid on behalf of such institutionalized spouse.
  • However, the institutionalized spouse may name as the beneficiary in the first position his or her community spouse or his or her minor or disabled child, provided the State of Rhode Island is named as a beneficiary of the annuity in the second position for at least the amount of Medicaid paid on behalf of the institutionalized spouse.
  • In the event the community spouse or such child or his or her representative disposes of any such remainder for less than fair market values, the State of Rhode Island must be named in the first position.
  • Any change in the beneficiary clause must be reported to the Medicaid agency within ten (10) days of any change and may result in a transfer of assets penalty.

A community spouse:

  • Must name the State of Rhode Island as the remainder beneficiary in the first position for at least the amount of Medicaid paid on behalf of his or her institutionalized spouse.
  • The community spouse may not change the beneficiary of the annuity after the death of the institutionalized spouse.
  • Any change in the beneficiary clause, before or after the death of the institutionalized spouse, must be reported to the Medicaid agency within ten (10) days of any change and may result in a transfer of assets penalty.

In the event the community spouse becomes institutionalized and applies for Medicaid, the beneficiary clause must be amended to additionally name the State of Rhode Island as the remainder beneficiary in the first position for at least the amount of Medicaid paid on behalf of such community spouse who becomes institutionalized, at the time such spouse applies for Medicaid for himself or herself, if the annuity was purchased during the look-back period.

Cases involving annuities are referred by field staff to the LTSS Administrator (or his/her designee) for evaluation. The agency representative forwards a copy of the annuity document, including date of purchase to the LTSS Administrator.

The LTSS Administrator (or his/her designee) consults, as needed, with the Office of Legal Services, and determines:

  • Whether the annuity is an available or unavailable resource;
  • The countable amount of the resource (i.e., the cash surrender value and/or negotiable value of the annuity); and
  • Whether the State has been made a remainder beneficiary for at least the amount Medicaid paid on behalf of the institutionalized individual; and
  • Whether a transfer of assets for less than fair market value has occurred as well as the amount of the uncompensated value and date of the transfer.

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About Matt Leonard

Matthew J. Leonard, Esq. has devoted his practice to handling the legal needs of individuals and their business interests through all stages of life. As an attorney with the law firm of Salter McGowan Sylvia & Leonard, Inc., he has been engaged to handle matters from basic to sophisticated involving Estate Planning, Elder Law, Medicaid Planning, Probate, Trust and Estate Administration, Real Estate, Business Transactions, Business Creation and related litigation.