When the Deficit Reduction Act of 2005 ("DRA") was signed into law on February 8, 2006, by President Bush, the intent of the legislation was to reign in national spending. Part of the DRA included eligibility criteria for Medicaid benefits. States were required to be in compliance with the provisions of DRA as a pre-condition to receiving federal Medicaid funds. The US Department of Health & Human Services, Centers for Medicare & Medicaid Services ("CMS"), provides guidance on the DRA provisions.
Within the Medicaid eligibility criteria, CMS stated that transactions involving an annuity and/or a promissory note would be treated as a transfer for less than fair market value, unless certain criteria were met. As for the annuity, DRA stated that an annuity purchase on, or after, February 8, 2006, requires the following:
- The Medicaid applicant or his or her spouse must disclose any interest he or she holds in an annuity at the time of the Medicaid application and/or Medicaid recertification;
- The annuity has to be irrevocable and non-assignable;
- The annuity has to be actuarially sound, and the period certain of the annuity is based on the Social Security Administration Life Expectancy Tables;
- The annuity must have payments in equal amounts during its term;
- In the case of an annuity for an individual - no community spouse, the state must be named as the remainder beneficiary in the first position for at least the total amount of medical assistance paid on behalf of the annuitant; and
- In the case of an annuity for an individual with a community spouse, the state must be named as the remainder beneficiary in the second position after the community spouse, or minor or disabled child.
As for the promissory note, DRA stated that a promissory note entered into on, or after, February 8, 2006, requires the following:
- The repayment term of the promissory note must be actuarially sound;
- Payments must be made in equal amounts during the term of the promissory note; and
- The promissory note must prohibit the cancellation of the balance upon the death of the lender.
In light of the above, I have been asked to answer the question, "Is a Medicaid Compliant Annuity a better Medicaid planning tool than a Promissory Note?" Depending on the facts of the case, my answer could be different. For example, if a community spouse has cash assets, it makes better sense t use the Medicaid Compliant Annuity rather than the Promissory Note, in that the Medicaid Compliant Annuity will be controlled by the insurance company rather than a family member. The insurance company will guarantee that the monthly payments go out as scheduled, and the community spouse can rely on the income. On the other hand, if the community spouse has a cottage - which is intended to remain in the family, the Promissory Note makes better sense than the Medicaid Compliant Annuity, in that there is no liquidity in which to fund the Medicaid Compliant Annuity.
As always, the aforementioned blog post was written in generalities, and if you have state-specific inquiries on the use of a Promissory Note you should always consult with the Medicaid rules and regulations in the respective state.
