Courts in Ohio and Massachusetts Rule, Contrary To New Jersey, That A Community Spouse's Post-DRA Annuity Purchase Is Not an Improper Transfer

As I blogged here, the New Jersey appellate court, in N.M. v. Division of Medical Assistance and Health Services, 405 N.J. Super. 353  (App. Div. 2009), certif. den., 199 N.J. 517 (2009), held that an annuity purchased for the sole benefit of the community spouse after the effective date of the Deficit Reduction Act of 2005 (DRA) may be considered in determining whether the resources of the institutionalized spouse exceed the resource limit for Medicaid eligibility. This case is one of major importance in the Medicaid estate planning area, and it is a major setback for those trying to help couples protect sufficient assets for the community spouse to live on when the ill spouse is institutionalized. However, based upon recent case law developments in other states, it appears that the New Jersey court’s analysis in the N.M. case may be less persuasive than anticipated. In that regard, courts in Ohio and Massachusetts have recently ruled, contrary to the court in New Jersey, that a community spouse’s annuity purchase is not an improper transfer.

An Ohio appeals court in Vieth v. Ohio Dept of Job & Family Services (Ohio Ct. App., 10th Dist., No. 08AP-635, July 30, 2009) held that the purchase of a post-DRA annuity by a community spouse is not an improper transfer of assets. In the Vieth case, Warren Vieth entered a nursing home in November 2006. His wife purchased two annuities, and then applied for Medicaid on his behalf. The state denied benefits, claiming the purchase of the annuities was an improper transfer of resources because the price of the annuities exceeded the community spouse resource allowance (CSRA).

Mr. Vieth appealed, and the trial court affirmed the state’s decision. The trial court found that post-DRA state law precluded a married couple from converting countable resources in excess of the CSRA into the community spouse’s income by purchasing an actuarially sound commercial annuity for the sole benefit of the community spouse. Mr. Vieth again appealed.

On appeal, the Ohio Court of Appeals reversed, holding that “funds used to purchase an actuarially sound, non-revocable, non-transferable commercial annuity, for the sole benefit of the community spouse, are not countable resources for Medicaid eligibility purposes.” Significantly, the Ohio appellate court in the Vieth case considered, but refused to follow New Jersey’s N.M. case, instead finding “more reasonable the interpretation and analysis” of the applicable federal statute set forth in the federal district court case entitled Weatherbee v. Richman, 595 F. Supp. 2d 607 (W.D. PA 2009), which held that a post-DRA annuity purchased for the community spouse is exempt for Medicaid eligibility purposes. I blogged about the Weatherbee v. Richman case here.

Similarly, in Clark v. Dehner (Mass. Supp. Ct., Middlesex, No. 08-02427-H, July 30, 2009), a Massachusetts trial court overturned an administrative hearing decision and ruled that a community spouse’s transfer of a partial interest in the home in exchange for a promissory note is an allowable transfer that cured the remainder of a Medicaid penalty period.

More than a year before he entered a nursing home in August 2006, George Clark and his wife, Susan, established an irrevocable, income-only trust into which they transferred their home. The transfer disqualified Mr. Clark from receiving Medicaid benefits for 52 months from the date of the transfer. When the penalty period was half over, Mrs. Clark, as trustee of the trust, transferred a 44% interest in the home to a daughter, Michelle Dionne, for no consideration. Ms. Dionne then transferred her interest in the property to Mrs. Clark individually, also for no consideration. Mrs. Clark then executed a deed selling her 44 percent interest in the property to Michelle in exchange for a promissory note calling for equal monthly payments and secured by the home’s mortgage.

When Mr. Clark subsequently applied for MassHealth (Medicaid) benefits, his application was denied on the grounds that the transaction was a transfer for less than fair market value. On appeal at an administrative hearing, the hearing officer upheld the agency’s denial. Mr. Clark again appealed.

The trial court ruled that the promissory note met legal requirements and that it succeeded in curing the earlier disqualifying transfer. The court held, among other things, that the relevant regulations do not provide that transactions between family members are, based upon that fact alone, disqualifying transfers.

The Ohio and Massachusetts cases appear to call into question the strength of the analysis in New Jersey’s N.M. case.