Last year, the U.S. Court of Appeals for the Third Circuit handed down an opinion on Medicaid-compliant annuities that could affect Medicaid planners across the nation. The court in Anabel Zahner v. Secretary
of Pennsylvania Department of Human Services overruled a
Pennsylvania District Court opinion, which left many scratching their heads about the use of short-term annuities. This
opinion is only binding in the states covered by the Third Circuit (Delaware, New Jersey, Pennsylvania and the U.S. Virgin
Islands), but it’s likely to have far-reaching effects on the use
of the Medicaid investment in other states.
Originally, the opinion was based on three families who
gifted large sums of money. They also bought short-term
Medicaid-compliant annuities for the purpose of paying for a
nursing home during the period of ineligibility created from
the large gifts. Under federal rules, the annuity should not
be considered an asset or resource, and the purchase of the
annuity is also considered to be a proper transfer of funds (i.e.,
a transfer that does not create an additional penalty period).
These families did their own version of the modern “
half-a-loaf” planning technique.
Modern half-a-loaf planning
Before the Deficit Reduction Act of 2005 (DRA), a common
planning technique was to give away half of the client’s assets
and use the other half to pay through the penalty period created by the gift, known as the half-a-loaf plan.
When Congress passed the DRA, it took proactive steps to
curtail this activity. The principal way of doing so was to change
Recent regulatory measures
and court cases have
changed the landscape for
the use of short-term annuities
in Medicaid planning.
WHAT YOU NEED TO KNOW
By Michael Anthony