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The Role of Medicaid Compliant Annuities in Asset Protection

Medicaid Compliant Annuities can be helpful when a community spouse has assets in excess of the community spouse resource allowance.

The United States Court of Appeals for the Sixth Circuit recently reversed a judgment in an Ohio case regarding the treatment of a Medicaid Compliant Annuity purchased by a community spouse.

In Hughes v. McCarthy, Mr. Hughes purchased a Medicaid Compliant Annuity in 2009 using $175,000 from his IRA after his wife entered a nursing home in 2005.  The annuity term was proportionate with Mr. Hughes’ Medicaid life expectancy, was irrevocable and non-assignable, and provided his wife as a beneficiary before the Ohio Medicaid agency.

Shortly after Mr. Hughes purchased the annuity a Medicaid application was made.  The Ohio Medicaid agency issued a notice that Mrs. Hughes was eligible, but assessed a 10-month divestment penalty period.  The Ohio Agency determined that Mr. Hughes’ annuity purchase was an improper transfer because he used a community resource (his IRA) in an amount that exceeded his CSRA, and because the annuity failed to name the Ohio Medicaid agency as the first contingent beneficiary.

The couple appealed, and the district court granted summary judgment in favor of the Ohio Medicaid agency.

The U.S. Appeals court reversed the district court’s rulings, and found that the state is not permitted to impose more restrictive requirements than the federal statute. The court found that the Medicaid Act does not restrict the annuity purchase to the time period before one spouse enters a nursing home.

The court also cited an exception to the Medicaid Act’s transfer penalty provision that permits the unlimited transfer of assets to the community spouse of an institutionalized individual or to another for sole benefit of the community spouse without rendering the institutionalized individual ineligible for coverage, when the transfer occurs before Medicaid eligibility is determined.

The court further found that, as long as the community receives no more than the amount invested in the contract, plus interest, for a period based on his life expectancy, the institutionalized spouse may be designated as contingent beneficiary.

This case is a great example of a state’s attempt to add qualification requirements for Medicaid Compliant Annuities that are not specifically required by federal law, creating unnecessary challenges for individuals to qualify for Medicaid.

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