Wednesday, December 21, 2011

Federal Government Agrees That Non-Assignable Annuities Should Be Treated As Income

The Deficit Reduction Act ("DRA"), which was enacted in 2006, specifically provides that a non-cancellable, non-assignable immediate annuity is to be treated as a stream of income rather than as an available resource for Medicaid eligibility purposes.  Some states, however, have taken an aggressive posture in attempting to claim that despite the stated prohibitions, these types of annuities may have value in the secondary market, and thus should be treated as a resource.

Connecticut has been among the most aggressive states in challenging the validity of a number of commonly used Medicaid planning strategies.  In the pending case of Lopes v. Starkowski, Connecticut has denied a Medicaid application on the grounds that an immediate annuity purchased by the community spouse -- Mrs. Lopes -- is in fact a resource rather than an income stream, and thus the state claims that Mrs. Lopes has "excess resources" that renders her husband ineligible for Medicaid.

The facts here are straightforward.   After Mr. Lopes' long-term care insurance benefits ran out, Mrs. Lopes purchased an immediate pay annuity from The Hartford for about $167,000.  This sum represented the approximate amount by which Mrs. Lopes' assets exceeded Connecticut's Community Spouse Resource Allowance ("CSRA").  The annuity is paying Mrs. Lopes monthly income of $2,340.83 per month for a term of six years.

While such an annuity would ordinarily be assignable -- and thus deemed an available resource under the DRA -- at the time she purchased the annuity Mrs. Lopes signed a specific assignment restriction that specifically prohibits Mrs. Lopes from assigning any of her rights under the contract to any third party.  Such an assignment prohibition would seemingly make Mrs. Lopes' annuity fully DRA compliant.

Connecticut, however, saw it differently, and claimed that they had found a third party -- Peachtree Funding -- that might be willing to purchase Mrs. Lopes' annuity income stream for a lump sum.  On that basis, Mr. Lopes' Medicaid application was denied.

Mrs. Lopes subsequently filed suit in Federal court challenging Connecticut's denial of her husband's Medicaid application.  The District Court granted summary judgment in Mrs. Lopes' favor, holding that because the annuity is non-assignable, it is to be considered an income stream rather than a resource.  The state appealed the District Court's decision, and the case is now before the Second Circuit Court of Appeals.

What's especially interesting about this case is that the Second Circuit asked the U.S. Department of Health and Human Services ("HHS") to submit an amicus curiae ('friend of the court") brief summarizing the federal government's position as to the treatment of a non-assignable, immediate pay annuity.  In its brief, HHS stated unequivocally that such an annuity should be treated as a stream of income rather than a resource, and that so long as the appellate court were to hold that Mrs. Lopes' annuity was in fact non-assignable, then "the district court's decision should be affirmed."

One would hope that the Second Circuit pays heed to HHS' position and confirms that a properly structured non-cancellable, non-assignable immediate annuity is to be treated as an income stream rather than a resource for Medicaid eligibility purposes.

Click here to see the HHS brief in its entirety.

Monday, December 12, 2011

Democrats Fire First Volley in 2012 Estate Tax Debate

In late November Democratic Rep. Jim McDermott introduced the Sensible Estate Tax Act of 2011.  Under the bill, the federal estate tax exemption would revert to $1 million per person, an exemption amount that last was in effect in 2001. The exemption amount would be indexed for inflation, and McDermott's bill would continue "portability" under the current law that permits spouse's to use their deceased spouse's unused federal estate tax exemption -- thereby effectively allowing married couples to exempt up to $2 million from the imposition of federal estate tax. Under the proposal, the estate tax rate would jump from the current 35% to 55%, which is the same percentage that existed prior to the 2011 EGTRRA law. 

The proposed legislation would also revive the state death tax credit, a devise that allowed the states that have a separate estate tax -- including New York -- to derive significant revenue by collecting a "pick-up" tax.

Even were the Democrats to control all three branches of government after the 2012 elections -- with a filibuster-proof majority in the Senate -- it is hard to envision a return to a $1 million federal estate tax exemption from the current $5 million exemption.  Of course if Congress does not act by December 31, 2012, then we will see an automatic reversion to the pre-EGTRRA exemption of $1 million, with a 55% rate. 

My guess is that the Democrats, after years of allowing the Republicans to set the agenda on this issue, are feeling emboldened to take a tougher stand given polling that seems to indicate that many people would like to see the deficit reduced by both spending cuts and higher taxes on the "wealthy."  But I believe that a $1 million exemption -- although it would likely only apply to approximately 3% of all estates -- is a non-starter.  Instead, a more likely outcome would be a $3.5 million exemption per person, with a continuation of portability.

That being said, a permanent repeal of the federal estate tax -- which seemed to be a real possibility just a few years ago -- appears to be highly unlikely as we head into 2012.

Click here to read more about Congressman McDermott's proposal.