Medicaid is a joint federal and state program that provides a funding source to pay nursing home costs for elderly and disabled persons.  The Medicaid program was created under Title XIX of the Social Security Act of 1965, codified in the U.S. Code, Title 42, Section 1396 et seq.  New Jersey’s Medicaid regulations are found in the New Jersey Administrative Code, Title 10, Chapter 71, N.J.A.C. 10:71-1 et seq. In New Jersey, Medicaid is the major source of funding used to finance long-term care costs.  Eligibility for Medicaid is based on financial need.  Under the Medicaid program, countable resources cannot exceed $2,000.00 for the Medicaid applicant.  N.J.A.C. 10:71-4.4.

Following the enactment of the Medicaid program, based upon concern over the widespread practice of purposeful asset divestiture, mostly by the wealthy, to obtain Medicaid eligibility, Congress enacted legislation to impose periods of ineligibility, or “penalty periods,” in cases in which a Medicaid applicant divested himself of assets for less than fair market value in an attempt to render himself “needy.” See Rainey v. Guardianship of Mackey, 773 So. 2d 118, 119 (Fla. Dist. Ct. App. 2000); In re John XX, 652 N.Y.S.2d 329 (Sup. Ct. 1996), appeal denied, 659 N.Y.S.2d 854 (1997). This legislation had imposed a 36-month “look-back period,” in which Medicaid officials will “look back” from the application date to analyze asset transfers by the applicant. Id. If a Medicaid applicant had disposed of assets for less than fair market value within the 36-month “look-back” period, the applicant may be subject to a period of Medicaid ineligibility (a “penalty period”), based upon the value of the uncompensated transfer. 42 U.S.C. §1396(p).  On February 8, 2006, President Bush signed the Deficit Reduction Act of 2005 (DRA) into law, which extended the look-back period to sixty (60) months for all transfers that occur after the date of enactment.  42 U.S.C. §1396(p)(c)(B)(i).

Upon receiving a Medicaid application, the authorities will determine whether the applicant disposed of assets for less than fair market value within the 60-month period immediately prior to the date of application.  42 U.S.C. §1396(p).  If so, a period of Medicaid ineligibility will ensue, called the “penalty period”, based on the value of the uncompensated transfer. Id. Following the period of ineligibility, the applicant is eligible for Medicaid benefits.

Notably, however, not all transfers of assets result in a Medicaid penalty period. Pursuant to the Deficit Reduction Act, 42 U.S.C. §1396p(c)(1)(F) and (G), the purchase of an annuity is not treated as a “transfer of assets for less than fair market value” if it meets certain criteria. In particular, an annuity will not subject the Medicaid applicant to a period of ineligibility if it (1) names the State as first remainder beneficiary for at least the amount of benefits paid; (2) is irrevocable and nonassignable; (3) is actuarially sound; (4) provides for equal payments, without deferral or balloon payments.

In James v. Richman, 465 F. Supp. 2d 395 (M.D. Pa. 2006)aff’d, 547 F. 3d 214 (3d Cir. 2008), the Third Circuit Court of Appeals held that the income from an irrevocable, non-transferable, non-assignable, single premium, immediate annuity purchased before the passage of the DRA is not countable in determining the institutionalized spouse’s Medicaid eligibility. (I previously blogged about the James v. Richman case here.)

In Weatherbee v. Richman, 595 F. Supp. 2d 607 (W.D. Pa. 2009), aff’d, 2009 U.S. App. LEXIS 24939 (3d Cir. 2009), which involved an annuity purchased after the DRA was enacted, the Third Circuit again held that a Medicaid compliant annuity was not countable in determining eligibility for Medicaid benefits. (I previously blogged about the Weatherbee v. Richman case here.)

In Lopes v. Starkowski, 2010 U.S. Dist. LEXIS 81829 (D. Ct. 2010), the U.S. District Court for the District of Connecticut held that the State of Connecticut cannot treat the income stream from an annuity as an available asset for the purposes of Medicaid eligibility. (My 2009 blog post about the Lopes case can be found here.)

Based upon the foregoing legal authority, although making a gift of a portion of a Medicaid applicant’s assets will result in a Medicaid penalty period, the corresponding purchase  of a Medicaid qualified annuity will not. The funds used to purchase the annuity will no longer be a countable resource, and the income stream that will coincide with the penalty period resulting from the gift will be used to pay for the applicant’s care during the penalty period. The annuity will provide an income stream that will coincide with the number of months of the Medicaid penalty period resulting from the gift.

During the period of Medicaid ineligibility resulting from the above-referenced gift, the Medicaid applicant will privately pay for his long-term care, using his annuity income as well as other income including Social Security, pension, Veterans benefits and the like. After the penalty period resulting from the gift ends, the income from the annuity will also end, and the applicant thereafter will be eligible for Medicaid benefits.