Zahner v. Mackereth: Short-Term Medicaid Compliant Annuities

Krause Financial

Disclaimer: With Medicaid, VA, and insurance regulations frequently changing, past blog posts may not be presently accurate or relevant. Please contact our office for information on current planning strategies, tips, and how-to's.

November 2014 Update:

The oral argument has taken place.  We anticipate a decision in Spring of 2015.  Listen to the oral argument here.


June 2014 Update:

The appellant’s brief has been filed, along with two Amicus Curiae Briefs.  Read more.


February 5, 2014, Update:

The litigators will be appealing the Zahner decision.  I am optimistic as to the result.


Original Post:

On January 16, 2014, the United States District Court for the Western District of Pennsylvania held that a Medicaid Compliant Annuity holding a term of 60-months is a legitimate, retirement-planning tool, while an annuity with a term less than 24 months is a sham-investment and a transfer for less than fair market value.

The plaintiffs of the case consisted of three different Medicaid applicants: two cases involving married couples with one spouse institutionalized, and one case of an institutionalized individual.  Each Medicaid applicant purchased a short-term Medicaid Compliant Annuity from ELCO Mutual Life & Annuity (“ELCO”), and a separate uncompensated transfer.  The two spousal cases also each involved a 60-month Medicaid Compliant Annuity from MetLife.  One of the spousal cases also included a promissory note and life estate.

Seven legal issues were discussed in the case, to-wit:


1.  “Granny’s Attorney Goes to Jail” Statute

The Pennsylvania Department of Public Welfare (“DPW”) argued that under 42 U.S.C. § 1320a-7b(a)(6), it is a crime “if an individual for a fee knowingly and willfully counsels or assists in the disposal of assets.”  The court declined to enforce the statute in that is clearly appeared to be unconstitutional, and therefor sided with the plaintiff.


2.  MetLife Annuities – Assignability

Regardless of the non-assignability endorsements that accompanied the annuity policies, DPW asserted that Pennsylvania Statute 62 Pa. Stat. Ann. § 441.6 makes all annuities assignable.  In light of the alleged assignability, DPW had considered the annuities to be countable resources to their owners.  The court felt that the anti-assignment provisions in the MetLife annuities were valid, regardless of Pennsylvania Law.


3.  MetLife Annuities – Remainder Designations

DPW asserted that the beneficiary designations of both MetLife annuities were unclear and not in compliance with the Deficit Reduction Act of 2005 (“DRA”).  The court determined that the errors in the initial annuity paperwork were clearly typographical in nature, and that the insurance company attempted to cure the mistake and make the designations compliant with DRA.


4. ELCO Annuities – Term of Annuity is Too Short

DPW proclaimed that the terms of the ELCO annuities were too short, and that they were sham investments.  In support, DPW referred to the definition of an annuity by the Centers for Medicare and Medicaid Services (“CMS”) in Section  3259.1(9.) of the State Medicaid Manual [Transmittal 64, §3259.1] as “a right to receive fixed, periodic payments, either for life or a term of years.”  DPW emphasized that the requirement specifies a plural term of years.  DPW further pointed out that the plaintiffs actually lost money after investing in the ELCO annuities.

One case involved an 18-month annuity purchase, while the applicant’s Medicaid life expectancy was 9.48 years.  The second case involved a 14-month annuity purchase, while the applicant’s Medicaid life expectancy was 6.77 years.  The third case involved a 12-month annuity purchase, while the applicant’s Medicaid life expectancy was 11.26 years.  It was the court’s opinion that the term of an annuity should bear a reasonable relatedness to the owner’s Medicaid life expectancy, and that the relation of life expectancy to the annuity term does not pass the “sniff-test” for any of the annuities issued by ELCO.


5.  ELCO Annuities – Trust-Like Devices Because Primary Purpose is to Hold Money

DPW was of the opinion that the ELCO annuities were transfers for less than fair market value in that they are “trust-like” devices.  This particular issue called for a review of Transmittal 64, which defines a trust as:

“any arrangement in which a grantor transfers property to a trustee or trustees with the intention that it be held, managed, or administered by the trustee(s) for the benefit of the grantor or certain designated individuals (beneficiaries)… The term ‘trust’ also includes any legal instrument or device that is similar to a trust.”


DPW again asserted that the ELCO annuities were shams and would cost more than they pay out, yet provided no calculations as to how that conclusion was arrived at.   The court determined Transmittal 64 indicates annuities may be considered “trust-like” devices and in the spirit of the annuity analysis, the annuity must pass the “sniff-test” in order to be considered a transfer for fair market value.


6.  ELCO Annuities – Assignability Under PA Law

For the same reasons pertaining to the MetLife Annuities above, the court felt that the anti-assignment provisions in the ELCO annuities were valid, regardless of Pennsylvania Law.


7.  Community Spouse Income after Institutionalization

DPW was of the opinion that the purchase of the annuities after institutionalization was contrary to federal law.  The court concluded that “a transfer of assets or a purchase of an annuity after the date in which a spouse is institutionalized will not per se be considered a transfer for less than fair market value and prohibited by Federal Law.”


So Now What?

Until the 30-day appeal period expires – February 14, 2014, the litigators could appeal the decision.  At this point all we can do is speculate.

Many questions have arisen as a result of this case.  What are the measurements of a “sniff-test?”  At what point would an annuity term be considered “reasonably related” to an applicant’s Medicaid life expectancy?  Would the applicant’s health, or monthly expenses, be a factor in determining if an annuity is “reasonably related?”

Read the text of the case here.


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