Elder-law attorneys are concerned that the new year will bring new rules in a number of states regarding how — and if — immediate annuities can work with Medicaid eligibility and planning.
Brokers and advisers who are unaware of these rules could inadvertently sell products at odds with state law, possibly resulting in clients' losing publicly funded long-term-care services, attorneys said.
"If brokers are selling these annuities in a Medicaid-planning context, they could be surprised when the state denies the client Medicaid," said Bernard A. Krooks, a managing partner at Littman Krooks LLP in New York.
The potential danger arises from the Deficit Reduction Act of 2005, which was meant to curb state spending on entitlement programs such as Medicaid. To discourage asset transfers performed to permit Medicaid eligibility, the federal government extended to five years, from three, the period during which Medicaid recipients can be scrutinized for such transfers.
Although it has been nearly two years since the DRA went into effect, 13 states are still in the process of creating their own legislation. Those states are: California, Hawaii, Illinois, Indiana, Louisiana, Maine, Nebraska, Nevada, New Hampshire, New Mexico, North Dakota, Oklahoma and West Virginia, according to Harry S. Margolis, founder of Margolis & Associates in Boston, who runs a network for elder-law attorneys.
"Each state has different rules, and they're being applied inconsistently," Mr. Krooks said.
NO GUARANTEES
Under the legislation, single-premium immediate annuities are also seen in a different light: The state must be named the primary remainder beneficiary of the policy unless the applicant has a spouse, or a minor or disabled child. The annuity must also be irrevocable and actuarially sound.
Some states, such as New York, have adhered closely to the federal laws, permitting the purchase of annuities provided that they jibe with the conditions above. Others have clamped down on the use of annuities, barring them from Medicaid planning.
"In Connecticut, we've always treated annuities on a case-by-case basis, never allowing vehicles like Medicaid-friendly annuities," said David Guttchen, director of the Connecticut Partnership for Long-Term Care in Hartford. The group is a private-public venture whose purpose is to encourage residents to purchase LTC coverage and apply for Medicaid Asset Protection if they need publicly funded care.
"We have always told the financial planning community that if they wanted to use annuities to shelter assets, it's a risky venture," Mr. Guttchen said. "There's no guarantee they can provide that this won't be seen as an improper transfer."
And such a transfer may be subject to state scrutiny, as was the case in Ross v. Department of Public Welfare in Pennsylvania, a case that was decided Nov. 15.
In February of 2003, Pauline A. Ross entered a nursing home. Two years later, her husband, Leonard, transferred $418,026.66 in marital assets into an irrevocable Medicaid-qualified single-premium annuity and was to receive $10,211.83 per month for about three years. This put the assets in Mr. Ross' name, making his wife impoverished, which would have qualified Ms. Ross for Medicaid.
However, an administrative-law judge tried to deny her benefits, arguing that there was a secondary market for the policy, and its value there was $202,364.
NON-INTUITIVE PLANNING
Though Pennsylvania lost the case, the state's challenge highlights the issue of suitability for annuity sellers, said Gary Mazart, a partner at Schenck Price Smith & King LLP in Morristown, N.J.
"The implications are pretty broad in that you can have situations where time has passed and the client was deprived of a different opportunity to protect those assets," he said.
"If you sell someone a Medicaid-qualified annuity and the state rejects that person, you would have to give your commissions back," Mr. Mazart added.
Advisers said that it would be best for their peers to work closely with elder-law attorneys on these cases to ensure that they don't overlook legislative nuances.
"This isn't intuitive planning," said Paula H. Hogan, founder of Hogan Financial Management LLC of Milwaukee. "There is another round of due diligence when you buy an annuity in Wisconsin, so it's best done with a financial planner coordinating with an elder-law attorney."
The issue might still be under the radar for some broker-dealers, too. "We do so little business in immediate annuities today," said Scott Stolz, president of National Planning Corp., the Santa Monica, Calif.-based insurance general agency of Raymond James & Associates Inc. in St. Petersburg, Fla.
"Anytime we get an order, we just send it through compliance, and if we run into an issue from that, we would deal with it after the fact."
Although broker-dealers may not have immediate concerns about this issue, "it's something [they] will look at later, especially since states are writing laws," Mr. Stolz said.
Some states are providing advisers with training. California, one of the states still working through DRA legislation, expects that it will work with local LTC and insurance trade groups to provide guidance on complying with state rules. The state expects to have its legislation ready by the end of August 2008, becoming effective Jan. 1, 2009.
"This is an enormously complicated piece of legislation," said Stan Rosenstein, chief deputy director of health-care programs for the California Department of Health Services in Sacramento. "We want to make sure that people don't incorrectly shelter their assets to get on Medi-Cal, but we want to balance that with proper exceptions for those with hardships."
Connecticut provides courses on DRA and Medicaid as part of mandatory training for agents who want to sell partnership policies, but there aren't any programs for those who don't participate with the partnership.
Thus the responsibility to avoid problems with these sales is entirely on the adviser's shoulders.
"The reality is that if you're in the business of helping people plan and you're using annuities, it would be incumbent on you to be as up to date and as knowledgeable as you can be," Mr. Guttchen said.
Darla Mercado can be reached at [email protected].
