A common strategy employed for Medicaid qualification purposes is to turn an asset of a married couple into an income stream for the community spouse. This is due to the name on the check rule, which states that whomever is listed as the payee on the check (or income payment), that is who the income is attributed to. Couple this with the fact that in most states a community spouse can have unlimited income without jeopardizing eligibility for an institutionalized spouse, and the result is a viable strategy for decreasing assets for eligibility purposes. The name on the check rule came under fire in a recent case, but emerged victorious.
In this case, Randy Hotmer purchased two irrevocable annuities set to make monthly payments to his wife. The Indiana Family and Social Services Administration (FSSA) determined that because Hotmer was the owner of the annuities, that income ought to be attributed to him, which resulted in his income exceeding the limit for Medicaid eligibility. The FSSA therefore denied his application for Medicaid benefits. However, the court of appeals held that attributing the income from the annuities to Hotmer was an error and should not have led to the denial of Medicaid benefits, and so reversed and remanded the case. Let’s take a closer look.
Hotmer purchased both annuities while living in a nursing home for long-term care. Although Hotmer himself was the owner of both annuities, his wife was both payee and the primary beneficiary, entitled to receive any remaining payments after his death. By contract the annuity could not be reassigned or transferred; the contract prohibited the annuitant or the beneficiary from being changed.
An administrative law judge (ALJ) overturned the denial of Medicaid benefits to Hotmer. The ALJ concluded that because the annuity payments were made in Hotmer’s wife’s name, they were not available to Hotmer, and thus his income did not exceed the limit. This decision was based on 42 U.S.C § 1396r-5(b)(2)(A)(i), which states that:
“(i) if payment of income is made solely in the name of the institutionalized spouse or the community spouse, the income shall be considered available only to that respective spouse;”
The FSSA then petitioned for review of this decision, whereupon the ALJ confirmed that the annuity income was not an available resource. The FSSA petitioned for review again, leading to a decision that the income ought to be attributed to Hotmer as the owner of the annuities. Specifically, the ALJ here referenced 42 CFR 435.608, which requires applicants to take “all necessary steps to obtain any annuities… to which they are entitled, unless they can show good cause for not doing so.” Hotmer then petitioned for judicial review pursuant to the Indiana Administrative Orders and Procedures Act. The trial court affirmed the FSSA’s decision, which Hotmer then appealed.
The court of appeals reversed and remanded this decision. In doing so, the court noted that under 42 U.S.C. § 1396p(c)(2)(B)(i), an individual who has applied for Medicaid benefits “shall not be ineligible for medical assistance… to the extent that… assets were transferred to the individual’s spouse… for the sole benefit of the individual’s spouse.” The court disagreed with the FSSA’s characterization of Hotmer as entitled to the annuity payments and that the income must be attributed to him. Furthermore, Hotmer did not fail to “take all necessary steps to obtain” them under 42 CFR 435.608; the annuity contracts are irrevocable, as in unalterable; Hotmer could not have obtained them. The court therefore held that the FSSA’s denial of Hotmer’s application for Medicaid benefits was arbitrary and capricious.
Many practitioners find relying on this rule and turning an IRA into an annuity for a community spouse is a viable crisis planning strategy. The Medicaid applicant annuitizes the IRA with the community spouse as the payee. The community spouse is the name on the check, which shields the income from the grasp of Medicaid eligibility analysis. Here, there is a win for Hotmer and a win for the name on the check rule.
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