“Name on the Check Rule” Win in Indiana
In a breaking decision out of Indiana, the state’s Court of Appeals ruled in favor of the “Name on The Check Rule” on a case where a Medicaid applicant was denied benefits due to having too much income. However, with the decision now set right, Indiana attorneys have this popular planning strategy back on the table for their senior clients.
What is the “Name on the Check Rule?”
The “Name on the Check Rule” is a guideline found in 42 U.S.C. § 1396r-5(b)(2) that describes to whom income belongs. For Medicaid purposes, income is attributed solely to the person whose name is on the check. Therefore, income made payable solely to the community spouse will not be counted as income belonging to the institutionalized spouse. This is a key distinction in that the institutionalized spouse’s income will go toward their Medicaid co-pay; or, in the event their income is too high, they could be ineligible for Medicaid benefits altogether.
So, how do we use this rule in Medicaid planning? The “Name on the Check Rule” is the basis for a Medicaid Compliant Annuity strategy designed to protect the institutionalized spouse’s retirement accounts. Other non-qualified accounts can be transferred to the community spouse and that spouse can then purchase an annuity to accelerate eligibility for Medicaid benefits. The community spouse is the owner and payee of the contract, and the income belongs solely to them.
However, this can’t be done with an IRA. Since ownership of the account cannot be transferred to the community spouse without the entire account becoming taxable, we utilize this innovative planning strategy. The institutionalized spouse transfers their IRA to a Medicaid Compliant Annuity (tax-free) and irrevocably designates the community spouse as payee. The institutionalized spouse remains the owner of the IRA annuity.
The result is that the account is eliminated as a countable asset, and the income goes straight to the community spouse. This makes the “Name on the Check Rule” strategy a near-perfect solution; however, not every state recognizes its viability. This is where Hotmer v. Indiana Family and Social Services Administration comes in.
Breaking Down the Hotmer Case
Mr. Hotmer entered a nursing home in April of 2017. He purchased two Medicaid Compliant Annuities and designated his wife, Mrs. Hotmer, as the payee. Under the “Name on the Check Rule,” the income should have been attributed to Mrs. Hotmer at the time of the Medicaid application in October of 2017. However, the local Medicaid office attributed the annuity income to Mr. Hotmer instead, causing his total income level to exceed the acceptable threshold for Medicaid. He was denied benefits.
After unsuccessfully appealing the denial at the trial court level, the Hotmer family took their fight to the Court of Appeals of Indiana, where the administrative law judge ruled in favor of the Hotmers and the “Name on the Check Rule” based on the irrevocable annuity contract language clearly designating Mrs. Hotmer as payee, instead of Mr. Hotmer.
What Does This Mean for Indiana Attorneys?
Given that this is not the first time the “Name on the Check Rule” has come under scrutiny in Indiana, attorneys in this state should consider this a big win for their clients. Using a Medicaid Compliant Annuity, and this strategy in particular, is a great way to protect your client’s assets while accelerating their Medicaid eligibility at the same time. The following are some best practices to keep in mind when using this strategy:
- Always use the institutionalized spouse’s full Medicaid life expectancy for the term in order to plan conservatively. (Remember, this strategy allows the community spouse to be named primary beneficiary ahead of the state Medicaid agency.)
- Ensure the annuity is properly funded using either a 60-Day Rollover or Trustee-to-Trustee Transfer to avoid tax consequences.
- Consider an alternative strategy if the IRA is of minimal value or if the couple is eligible for an income shift under the Monthly Maintenance Needs Allowance rules.
If you want to learn more about using the “Name on the Check Rule” in your state, contact our office by phone at (866) 605-7437 or email [email protected]. For more updates on the status of this decision, be sure to create your free Attorney Access account and check your dashboard for the latest information.