Dale's Blog

A Medicaid Agency's Right as an Annuity Beneficiary

kendrabishop@medicaidannuity.com — Wed, 01 Feb 2012 01:01:02 GMT

A recent court case, Hutcherson v. Arizona Health Care Cost Containment System Administration ("AHCCCS"), brought a ruling down regarding the State's recovery rights as a beneficiary of a Medicaid Compliant Annuity. Within the decision:

"We hold that the 2006 amendment to 42 U.S.C. § 1396p(c)(1)(F)(i) creates a right in the State to recover as a remainder beneficiary against a community spouse's annuity for an institutionalized spouse's medical costs. We further hold that the State's recovery is not limited to the amount paid for the institutionalized spouse's medical costs as of the date of the community spouse's death."

In light of the above, should the community spouse predecease a Medicaid Compliant Annuity wherein the state is designated as a primary beneficiary and the state elects to continue the monthly payments, the state can simply continue to recover as long as the payments are being made and the institutionalized spouse is receiving Medicaid benefits.

Some time ago I sent a brief survey to each state Medicaid agency to inquire specifically as to each states' Medicaid claim amount, and if it ends on the date of death of the community spouse. Over 60% of the states that responded replied with a yes - the Medicaid recovery claim amount ends on the date of death of the community spouse. There were a handful that said no - the Medicaid recovery claim amount continues as long as the payments are being made and the institutionalized spouse is receiving Medicaid benefits.

This situation is exactly why it is best to be as specific as possible in beneficiary designations, especially those for annuities owned by community spouses. Take for example a Wisconsin case where a community spouse purchases a Medicaid Compliant Annuity. I would recommend that the spouse make the following primary beneficiary designation, assuming a minor and/or disabled child is not involved in the scenario:

"The Wisconsin Department of Health Services Estate Recovery Program for the total amount of medical assistance paid on behalf of the institutionalized individual, namely [institutionalized spouse's full legal name]. The primary beneficiary's claim amount ends on the date of death of the owner, namely [community spouse's full legal name]."

Such language would ensure that the state's claim amount does not continue to run past the date of the death of the community spouse. A vague designation, such as "State of Wisconsin" could leave a potential Medicaid recovery nightmare in the event of a community spouse's premature death. What government agency is entitled to collect? Who is the claim amount based on? To what extent of the residual balance is the beneficiary entitled to?

Trusts and Annuities

kendrabishop@medicaidannuity.com — Wed, 25 Jan 2012 15:34:41 GMT

Trusts come in many different forms and are used for many different purposes. Generally, trusts are either revocable or irrevocable, grantor or non-grantor, inter vivos or testamentary, and simple or complex. Trusts are used to manage assets, distribute income, provide for college educations, pay for funerals, pay estate tax liabilities, and qualify for government entitlement benefits - Medicaid, SSI, and Veterans pension.

Annuities also come in many different forms and are used for many different purposes. Generally, annuities are either tax-deferred or immediate; fixed, indexed or variable; qualified or nonqualified; and Medicaid compliant or non-Medicaid compliant. Annuities are used to defer income taxes, manage taxable income, control investment risk, and qualify for government entitlement benefits - Medicaid, SSI, and Veterans pension.

When it comes to Medicaid planning the type of trust that is most commonly used is an irrevocable trust. The trust is a Medicaid pre-planning tool in that it must be established, funded, and has five years pass from the date of the last transfer in order to become an effective Medicaid tool. The trust may be established as a grantor trust, giving the grantor the right to its taxable income, but it is not required. If the trust passes all the aforementioned criteria and the grantor later enters a nursing home and needs Medicaid benefits, none of its assets will be taken into consideration - they are deemed not owned by the grantor.

If the irrevocable trust in the previous paragraph contains cash assets, rather than having the trust pay taxes (assuming the trust is not a grantor trust) at it's high tax rates the better approach is to have the trustee invest the cash into tax-deferred annuities. A tax-deferred annuity, even though it earns income each year, is not taxed until the trustee elects to take a withdrawal or annuitize the tax-deferred annuity contract. At that time the trust would be required to pay income taxes. If the tax-deferred annuity involves a withdrawal, the taxable portion of the withdrawal amount is to the extent of deferred income - "Last in First Out" treatment. Once all of the deferred income is withdrawn, the remaining portion is simply return of principal - which is always non-taxable. If the tax-deferred annuity is annuitized (converted to an immediate annuity), the deferred income is equally spread out over the period certain time frame. Thus, a portion of each immediate annuity payment is deferred income - taxable, and return of principal - nontaxable.

Important Elder Law Number Updates for 2012

kendrabishop@medicaidannuity.com — Wed, 11 Jan 2012 14:17:49 GMT

As previously mentioned in a prior blog post I made, the first cost-of-living adjustment since 2008 has recently been made. This adjustment brought a 3.7% increase to many of the planning figures used in an elder law practice every day.

Spousal Impoverishment Standards

Minimum Community Spouse Resource Allowance: $22,728
Maximum Community Spouse Resource Allowance: $113,640
Maximum Monthly Maintenance Needs Allowance: $2,841
Income Cap Limit: $2,094
Minimum Home Equity Limit: $525,000
Maximum Home Equity Limit: $786,000

Medicare Deductibles, Premiums and Co-payments

Medicare Part A Deductible: $1,156
Medicare Part B Premium: $99.90
Medicare Part B Deductible: $140
Co-payment for hospital stay, days 61-90: $289 per day
Co-payment for hospital stay, days 91 and up: $578 per day
Co-payment for skilled nursing facility stay, days 21-100: $144.50 per day

Long-Term Care Insurance Federal Tax Deductible Figures

Taxpayer's Age at End of Year // Deductible Limit

Age 40 or less // $350
More than 40 but less than 50 // $660
More than 50 but less than 60 // $1,310
More than 60 but less than 70 // $3,500
More than 70 // $4,370

State-specific figures can be located in the Attorney Resources section of this site. Please note that access to the figures are only provided to elder law attorneys.

To view the documentation released by the Centers for Medicare and Medicaid Services please click here.

To view the documentation released by the American Association for Long-Term Care Insurance please click here.

A thank you goes to www.elderlawanswers.com for previously posting this information on January 3, 2012.

The End of the J.G. Wentworth Battle

kendrabishop@medicaidannuity.com — Fri, 06 Jan 2012 19:09:29 GMT

Many elder law practitioners that utilize Medicaid Compliant Annuities in their planning are familiar with J.G. Wentworth proclaiming their ability to purchase any annuity - regardless of the provisions.

We all know that a Medicaid Compliant Annuity cannot be sold under any circumstances. The insurance company will refuse to honor any requests regarding change in ownership, annuitant, payee, or beneficiary. This is because a Medicaid Compliant Annuity is irrevocable and non-assignable, in accordance with the requirements set forth by the Deficit Reduction Act of 2005.

Notwithstanding the above, over the years I have seen many cases progress to fair hearings solely because J.G. Wentworth's false claims. And every case had a very similar set of case facts: a Medicaid Compliant Annuity was purchased, J.G. Wentworth claimed they could buy it and provided a false valuation, and the applicant was then denied Medicaid benefits for being overresourced. It was a truly unfortunate situation, and one that I attempted to correct directly with J.G. Wentworth on numerous occasions, to no avail.

However, I am pleased to announce that the battle with J.G. Wentworth is finally over. As of December 15, 2011, J.G. Wentworth has agreed to start working with Krause Financial Services. The company will now provide a formal written letter stating that they are unable to purchase the policy due to the provisions, if it is in fact irrevocable and non-assignable.

Predeceasing a Medicaid Compliant Annuity

kendrabishop@medicaidannuity.com — Tue, 13 Dec 2011 15:27:29 GMT

"If a single person buys a Medicaid Compliant Annuity to provide income during a disqualification period, and the state Medicaid agency is designated as the primary beneficiary, what if the individual predeceases the annuity?"

This is an excellent question that I receive quite often in the Ask Dale forum. Krause Financial Services has a vast amount of experience with individuals predeceasing their Medicaid Compliant Annuities, and has worked with many states' Medicaid agencies in meeting outstanding Medicaid claims.

In the event an individual was to predecease his or her divestment penalty period, a Medicaid agency would not be entitled to the residual benefits remaining in the Medicaid Compliant Annuity in that the Medicaid agency did not provide any medical assistance benefits to the applicant throughout the duration of the divestment penalty period. Exceptions do apply, such as in an instance wherein the applicant was previously on Medicaid benefits and already had a claim amount prior to entering into the divestment penalty period. Or, if the individual received Medicaid coverage for items such as medications throughout the divestment penalty period, a small claim amount may exist.

After an individual passes, the death is reported to Krause Financial Services. We then contact the state Medicaid agency and determine if a claim amount exists. In most cases the state Medicaid agency will return a letter stating that zero Medicaid services were provided, and there is no amount owed to the state. When that letter is provided to the insurance company that issued the Medicaid Compliant Annuity, the state Medicaid agency's primary beneficiary position is determined irrelevant and the residual benefits are paid to the contingent beneficiaries - usually the children.

To avoid any outstanding Medicaid claim repayment issues, I always recommend making beneficiary designations as specific as possible - include the specific Medicaid agency name and the name of the individual for whom benefits were paid on behalf of. For example:

"The State of Wisconsin - Department of Health Services Estate Recovery Program for the total amount of medical assistance paid on behalf of the institutionalized individual, namely [John Smith]."

This way there is no room for the state Medicaid agency to make an error in judgment, in that the designation is spelled out very clearly. In spousal cases, wherein the community spouse owns the Medicaid Compliant Annuity, I recommend including the following language in addition to the above:

"The primary beneficiary's claim amount ends on the death of the owner, namely [Betty Smith]."

Several interesting points regarding designating the state Medicaid agency as a beneficiary of a Medicaid Compliant Annuity:

When an institutionalized spouse owns a Medicaid Compliant Annuity, the community spouse can always be designated before the state Medicaid agency.
15 post-DRA states* allow for the institutionalized spouse to be designated before the state Medicaid agency in instances where a Medicaid Compliant Annuity is owned by a community spouse.
2 post-DRA states* do not require the state Medicaid agency to be designated as a beneficiary on annuities consisting of tax-qualified funds (i.e. funds from an IRA, 401(k), etc.).

The staff of Krause Financial Services has extensive experience in the appropriate beneficiary designations, and reviews each Medicaid Compliant Annuity application to ensure that the language meets each states' requirements. Other advisors may tell you they can "get the same product," but don't be fooled - they can't! Purchasing a product and obtaining the services you need - and the knowledge behind it, are completely different things.

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*Contact Krause Financial Services here to determine if your state falls under this category.

Using an Annuity with a Personal Services Contract

kendrabishop@medicaidannuity.com — Thu, 17 Nov 2011 22:46:29 GMT

Primarily in Florida, Personal Services Contracts ("PSK"), which are also referred to as Caregiver Agreements, are widely used as a spend-down tool for Medicaid and Veterans benefits planning.

A PSK generally services four purposes:

It reduces an applicant's countable resources to an acceptable level, which entitles the applicant to receive benefits;
It outlines the duties and obligations of the parties;
It establishes the compensation that will be paid to the caregiver; and
It dictates the duration of the immediate annuity, which is usually stretched over the care recipient's life expectancy.

Meet Carl Jones.
Carl Jones, a 77-year-old single individual, entered a nursing home October 1, 2011. As a result of his advanced Parkinson's disease, which greatly limits his mobility, Carl receives personalized daily assistance from his son Tom in addition to the services provided at his nursing home facility. Carl has personal property, one car, $315,000 in non-IRA bank accounts, and monthly income from social security and pension of $2,100. The nursing home bill is $6,200 per month. Tom would like to immediately qualify his dad for Florida Medicaid benefits.

Carl's Planning Goals.
In that Carl's care has become more extensive, Tom had reduced his full-time employment to only part-time in order to meet Carl's needs. Carl now has two goals:

Reasonable compensate Tom for his care; and
Become eligible for Florida Medicaid benefits to meet his monthly expenses.

Provisions of the PSK.
After consulting with an elder law attorney, Tom's care was valued at $30 per hour. With Tom usually providing three hours of care a day, he was on average providing 91.25¹ hours of care a month. With Carl being 77 years of age, his Florida Medicaid life expectancy is 9.34 years/112.08 months. With Tom's care of 91.25 hours per month at $30 per hour multiplied by Carl's life expectancy of 112 months, the total cost of Tom's personal services is valued at $306,600.

Carl Purchases an Immediate Annuity.
In order to minimize federal income taxes to Tom, pay the compensation consistently on a monthly basis, and not worry about whether he will have the funds in the future, Carl purchased an immediate annuity with a single premium cash payment of $302,034². The immediate annuity reflected Carl as the "annuitant" and "primary beneficiary," and Tom as the "owner" and "payee." In that the annuity is "owner driven," versus "annuitant driven," if Tom dies and Carl survives him Carl gets the remaining scheduled payments. In the alternative, if Carl predeceases Tom and scheduled payments remain Tom continues to receive them. At the same time, Tom may alter the primary beneficiary to designate his intended heirs.

Remaining Spend-Down Amount.
With the total countable resources of $315,000 reduced by the premium of $302,034 for Carl's immediate annuity, and Carl's individual resource allowance of $2,000, an amount of $10,966 in countable resources remains. Carl decides to purchase a pre-paid funeral plan as a quick and easy method of converting the remaining spend-down amount into an exempt resource.

Plan Benefits.
Upon funding the PSK, and purchasing the pre-paid funeral plan, Carl is immediate eligible for Florida Medicaid benefits. He has also ensured that his personalized care needs are met and his son, Tom, is compensated accordingly.

Income Tax Consequences.
From the IRS' viewpoint, in that tom never had dominion and control over the cash payment amount of $302,034, Tom only pays federal income taxes on the annuity payments that he receives in a given calendar year. The reason for this relates to the fact that Carl and his insurance agent sent the annuity application, along with the premium payment, directly to the insurance company, and Tom never acquired any right to cancel the annuity contract, or seek a full refund.

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¹ This amount was determined by multiplying three hours by 365 days and dividing the resulting figure by 12 months.
² This is the investment amount necessary to provide Tom with a monthly payment of $2,737.50 in accordance with his hourly wage of $30 and average monthly care of 91.25 hours per month.

Intentionally Defective Grantor Trusts and Tax-Deferred Annuities

kendrabishop@medicaidannuity.com — Mon, 07 Nov 2011 18:38:20 GMT

An Intentionally Defective Grantor Trust ("IDGT") is an irrevocable trust created so that the assets of the trust are attributable to the grantor for federal income tax purposes, but not for gift, estate, or generation skipping transfer tax. The "defect" is that the grantor reports all of the income, deductions, and credits associated to the trust property on his or her personal income tax return. The IDGT does not file an income tax return - IRS Form 1041.

Likewise, when the IDGT purchases property from the grantor, since the IDGT is ignored for federal income tax purposes, the sale does not result in any gift, capital gain or loss, or depreciation recapture.

When a tax-deferred annuity ("TDA") is purchased and owned by an IDGT it will be held in the name of the trust. The grantor will be named as the annuitant and the IDGT will be named as the primary beneficiary. If all the beneficiaries of the IDGT are natural persons, the TDA will continue to accrue growth on a tax-deferred basis. When the annuitant dies, the TDA will continue to accrue growth on a tax-deferred basis. When the annuitant dies, the TDA death benefit will be taxed on the growth. This type of TDA is "annuitant-driven." If the TDA is not immediately liquidated by the IDGT - which is usually the case, the TDA must be liquidated within the five years following the annuitant's death; the terms of the IDGT usually play an important role in the termination of the IDGT and the distribution of its property.

If the TDA names an individual as the primary beneficiary rather than the IDGT, instead of taking the lump sum that person may elect to annuitize the TDA over his or her lifetime; the annuitization will stretch the income tax consequences over the primary beneficiary's lifetime. Additionally, if the named primary beneficiary is the spouse of the annuitant, he or she may elect to continue the TDA, rather than liquidate it.

In light of the above, does it make any sense to use an IDGT and TDA in Veterans benefits or Medicaid planning? Some would argue "yes," while others would argue "no." It really depends on which state the applicant resides in and his or her intentions regarding the use of the TDA.

Veterans' Compensation Cost-of-Living Adjustment Act of 2011 - UPDATED 12/05/2011

kendrabishop@medicaidannuity.com — Tue, 25 Oct 2011 21:03:21 GMT

The first cost-of-living adjustment since 2008 has recently been made, bringing a 3.7% increase in benefits.

The cost-of-living adjustments are based on increases in the Consumer Price Index for Urban Wage Earners and Clerical Workers ("CPI-W"). A cost-of-living adjustment effective for December of the current year is equal to the percentage increase (if any) in the average CPI-W for the third quarter of the current year over the average for the third quarter of the last year in which a cost-of-living adjustment became effective. If there is an increase, it must be rounded to the nearest tenth of one percent. If there is no increase, or if the rounded increase is zero, there is no cost-of-living adjustment.

The senate unanimously passed S. 894: Veterans' Compensation Cost-of-Living Adjustment Act of 2011, effective on December 1, 2011, for benefits to be payable in January of 2012.

S. 894 only provided for an increase, effective December 1, 2011, in the rates of compensation for veterans with service-connected disabilities and the rates of dependency and indemnity compensation for the survivors of certain disabled veterans. There was no reference to an increase in pension benefits. At this time, it is unclear whether an increase in pension benefits will be made.

DECEMBER 5, 2011, UPDATE:

The Department of Veterans Affairs has updated their manual to provide the 2012 pension figures reflecting the aforementioned 3.6% cost-of-living adjustment. The new pension benefit figures, effective December 1, 2011:

Single Veteran: $1,703
Married Veteran: $2,019
Surviving Spouse of a Veteran: $1,094

Some information taken from www.ssa.gov.

Sale of Residence, IRC § 121, and Trust Ownership

kendrabishop@medicaidannuity.com — Fri, 07 Oct 2011 18:34:50 GMT

Internal Revenue Code ("IRC") § 121 provides that a taxpayer may exclude from taxable income up to $250,000 of the gain realized on the sale or exchange of a principal residence, provided that the taxpayer owned and used the home as a principal residence for periods aggregating at least two years during the five years before the sale date and did not take advantage of the home sale exclusion for other property within the two year period before the sale. A qualified married couple, as well as a surviving spouse, may exclude up to $500,000 under certain situations.

A principal residence may include a house, houseboat, house trailer or cooperative apartment, and whether or not it properly qualifies as a principal residence depends on all of the facts and circumstances. IRC Regulation ("Reg.") § 1.121-1(b)(1).

The taxpayer may establish ownership and use for periods aggregating two years or more by showing ownership and use for 24 full months or for 730 days. The requirements of ownership and use may be satisfied during non-concurrent periods as long as both the ownership and use tests are met during the five year period ending on the date of the sale. IRC Reg. § 1.121-2(a)(3). If either spouse filing jointly fails to meet the above requirements, the maximum limitation amount to be claimed by the couple is the sum of each spouse's limitation amount determined on a separate basis as if they had not been married, except that each spouse is treated as having owned the property during the period that either spouse owned it.

IRC Reg. § 1.121(c)(3)(i) provides that if a residence is owned by a trust, for the period that the taxpayer is treated under IRC § 671 through 679 as the owner of the trust or the portion of the trust that includes the residence, the taxpayer will be treated as owning the residence for purposes of satisfying the two year ownership requirement of IRC § 121. In such an event, the sale or exchange by the trust will be treated as if made by the taxpayer. Moreover, if a residence is owned by an eligible entity within the meaning of IRC § 301.7701-3(a) that has a single owner and is disregarded for federal estate tax purposes as an entity separate from its owner, the owner will be treated as owning the residence for purposes of satisfying the two year ownership requirement of IRC § 121 and the sale or exchange by the entity will be treated as if made by the owner. IRC Reg. § 1.121-1(c)(3)(i)-(ii).

Building Flexibility into an Irrevocable Trust

kendrabishop@medicaidannuity.com — Fri, 23 Sep 2011 20:13:57 GMT

Today, an irrevocable trust is an excellent planning tool for those clients wanting to qualify for Medicaid benefits in the future. Medicaid is the government program that pays for the bulk of long-term care provided in a nursing home setting.

The goal of the plan is to establish and fund the trust with assets that are countable (unprotected) for Medicaid purposes. Once the trust is established, funded, and five years has passed after the date of the last transfer, all the assets titled in the trust are no longer owned by the transferor and are protected from the high costs of a long-term nursing home stay. With only limited assets, generally $2,000 or less, the transferor is eligible for Medicaid benefits. Once approved, the only thing that he or she has to do is pay all of his or her monthly income to the nursing home (Medicaid monthly co-pay), retaining only a small amount (personal needs allowance) to purchase personal items - toothbrush, toothpaste, haircuts, clothing, etc.

When establishing the irrevocable trust, what powers can the settlor (also referred to as the "grantor" or "trustor") grant to the trustee, giving the trust as much flexibility as possible without jeopardizing the goal of the trust? The powers may include, but are not limited to:

the trustee's right to invest any cash assets into tax-deferred annuities; the advantage of this power is that the annuities will grow tax-deferred and 1041 fiduciary income tax returns will not need to be filed - no taxable income;
the independent trustee's right to make discretionary distributions of income to transferor's children and grandchildren;
the trustee's right to lend funds to any person, including the grantor, for adequate consideration; and
the trustee's right to terminate the trust and distribute the trust assets, assuming the transferor's children all agree; the assumption is that if the transferor is receiving Medicaid benefits there may be no real reason to continue the trust.