Public Law Number 109-171 (The Deficit Reduction Act of 2005) includes new requirements for annuities to satisfy the Medicaid asset transfer rules.
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Do these DRA annuity rules apply to structured settlement
annuities, including those paid to a community spouse, and if so, how?
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Do these DRA annuity rules impact structured settlement annuities irrevocably assigned to special needs trusts (SNT), and if so, how? Note: SNTs are sometimes referred to a supplemental needs trusts. SNTs include self-settled (d)(4)(A) trusts and (d)(4)(C) pooled trusts.
Sylvius H. von Saucken, a partner in The Garretson Law Firm, has written
an important new article addressing these questions. von Saucken
introduced his article, titled "The DRA of 2005 - What Havoc has
Congress Wrought?", as a featured presentation at the 2007 Annual
Meeting of the Society of Settlement Planners (SSP). von Saucken's
article provides an excellent summary of the DRA from a structured
settlement perspective. His article also compares arguments for and
against applying the DRA annuity rules to structured settlements
annuities - whether paid directly to Medicaid recipients and their
spouses or indirectly using a special needs trust.
von Saucken's analysis should
serve as a wake-up call for the structured settlement, settlement
planning and special needs planning industries which have heretofore ignored the serious potential
problems the DRA poses for structured settlement annuities.
von Saucken's conclusions:
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There appears to be very little (if any) direct authority whether and
how the Deficit Reduction Act of 2005 (DRA) impacts special needs
trusts, structured settlement annuities, or structured settlement factoring transactions.
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If applicable, the new DRA annuity rules could negatively impact the
structured settlement market by substantially restricting the types of
structured settlement annuities that allow recipients to qualify for
Medicaid long term care.
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Greater clarity is needed from Congress, the Centers for Medicare & Medicaid Services (CMS), and/or the states concerning the impact of the
DRA's annuity rules on structured settlements paid directly to
claimants or their spouses or indirectly using a special needs trust.
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Additional lobbying and education is required by the structured settlement
industry to help Congress, CMS and the states connect the DRA rules to
structured settlement annuities.
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The DRA annuity rules point out a growing potential conflict among
various federal and state laws that impact structured settlements.
This blog post (Inconvenient Questions - 1), the first of three S2KM
posts reviewing von Saucken's article, identifies the DRA requirements
impacting annuities. S2KM's next blog post (Inconvenient Questions - 2)
will summarize von Saucken's arguments for and against the DRA's applicability to
structured settlements. A third S2KM blog post (Inconvenient Questions
- 3) will consider the relevance and significance of past "authority"
from the Social Security Administration (SSA) and CMS to the DRA structured settlement issues.
Enacted as Federal law on February 8, 2006, the DRA was intended to cut
federal spending for certain domestic programs by billions of dollars.
One the primary programs targeted by the DRA was Medicaid, a joint
federal-state program of medical assistance for low income persons who
are aged, blind or disabled. Many personal injury victims receive
Medicaid benefits prior to settlement and subsequently depend upon
Medicaid to pay for their long term care.
The Omnibus Reconciliation
Act of 1993 (OBRA) defined self-settled special needs trusts and pooled
trusts as safe harbor administrative vehicles for trust beneficiaries
to avoid Medicaid's income and resource
requirements as well as Medicaid's asset transfer rules. Although OBRA
does not include any statutory reference to annuities or structured
settlements, structured settlements annuities
have been used frequently since 1993 to fund both types of special
needs trusts.
The most recent authority concerning structured
settlement annuities paid into self-settled special needs trusts are private letters written by SSA and CMS to two
attorneys, Jay Sangerman and Roger Bernstein, representing the National
Structured Settlement Trade Association. These letters, however, do not
address the DRA annuity rules or their impact on structured settlements.
von Saucken's extensive article summarizes the DRA's many complicated and controversial requirements. His article primarily focuses, however, on the two DRA sections
that appear most important for structured settlements. Each of these
DRA sections apply specifically to disabled persons who receive, or
expect to apply for, Medicaid long term care.
DRA section 6011 - Asset Transfer Rules Changes
Several Medicaid programs provide for an
administrative penalty triggering a period of ineligibility resulting from the
transfer of assets by a Medicaid applicant or spouse to a
non-spouse for less than fair market value. DRA section 6011 extends
the look back period for Medicaid asset transfers from three years (36 months) to five years (60
months). This means that state Medicaid agencies will now review all
transfers (including annuity purchases) that an applicant for long term
care made during the previous five years as part of its eligibility
determination.
Although the DRA does not change the method for
calculating the penalty period, it does change the beginning date of
the penalty period which, under pre-DRA rules, was the date the
transfer was made. Under the new DRA rules, according to von Saucken, the
penalty period begins on the later of the date of transfer or the date: 1)
the applicant is financially eligible for Medicaid long term care; and
2) the applicant requires long term institutional care; and 3) the
applicant has filed a Medicaid application; and 4) there exists no
other outstanding penalty period. von Saucken believes these changes
will make it more difficult for Medicaid applicants to use asset
transfer planning to obtain early Medicaid eligibility.
DRA section 6012 - Annuity Rules
As von Saucken's article points out, the DRA does not address whether an annuity is a countable asset if it
is not considered an asset for transfer purposes. DRA section 6012, however, does add
new requirements for annuities to satisfy Medicaid's asset transfer
rules for those persons who receive or apply for Medicaid long term
care.
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Disclosure - Pre-DRA, according to von Saucken, there were no formal Medicaid disclosure rules for annuities
other than listing all assets on a Medicaid long term care application.
The DRA now requires Medicaid applicants and their spouse to specifically disclose a
description of any interest in an annuity at the time of a Medicaid
application or recertification of eligibility. If an applicant or
spouse fails to disclose any interest in an annuity, the applicant may
be denied Medicaid long-term care services. According to CMS, this disclosure requirement
applies regardless of whether an annuity is irrevocable or is treated
as a countable asset.
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State as Remainder Beneficiary
- The DRA requires all states to include
in their Medicaid long term care application and recertification a
statement naming the state as a remainder beneficiary for any annuity
purchased on or after February 8, 2006. If the Medicaid applicant has a
community spouse or minor or disabled child, the state must be named as
secondary beneficiary after those individuals. As a remainder
beneficiary, the state may receive up to the total amount of medical
assistance paid on behalf of the Medicaid recipient, including both
long term care services and community services. If the state is not
named as a remainder beneficiary in the correct position, the purchase
of the annuity will be considered a transfer for less than fair market
value. CMS interprets the statute to mean that the full purchase value
of the annuity will be considered the amount transferred. The state
must also notify the annuity issuer of the state's rights as a
remainder beneficiary.
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Naming the state as remainder beneficiary, according to von Saucken, represents a new Medicaid
requirement not previously applicable to annuities. By comparison, OBRA
established its own state reimbursement rules for self-settled special
needs trusts (42 U.S.C. 1396p(d)(4)(A)) and pooled trusts (42 U.S.C.
1396p(d)(4)(C)). Following the death of the beneficiary of a (d)(4)(A)
trust, the trust is required to reimburse the state all amounts
remaining in the trust up to the amount of total medical assistance
paid on behalf of the beneficiary under the state Medicaid plan. As a
pre-DRA Medicaid planning strategy, many special needs attorneys
recommended listing a family member as the beneficiary for structured
settlement annuities used to fund special needs trusts to prevent the
state from accessing any remaining annuity payments following the
annuitant's death. Some state courts, including New York, supported
this pre-DRA strategy.
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Additional Annuity Design Rules
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In addition to naming the state as remainder beneficiary (referred to
as "F" rules because they amend 42 U.S.C. 1396p(c)(1)(F)), the DRA
annuity rules set forth several other annuity design rules (referred to
a "G" rules because they amend 42 U.S.C. 1396p(c)(1)(G)). von Saucken explains how both DRA annuity rules "F"
and "G" set forth exceptions to avoid characterizing the
purchase of an annuity as a transfer for less than fair market value.
Although commentators, including the National Academy of Elder Law
Attorneys (NAELA), believe these DRA annuity "F" and "G" rules represent alternative
exceptions, CMS has stated that annuities must meet both the "F" and "G"
rules or they will be considered transfers for less than fair market
value.
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In § 1917(c)(1)(G) (DRA annuity rule “G”), the DRA creates two
alternative exceptions to the Medicaid asset transfer rules for
annuities. The first exception is for retirement annuities: if the
annuity is owned by an IRA or if the annuity is purchased with proceeds
from an IRA account and held within that account. The second,
alternative DRA annuity rule "G" exception requires an annuity to be: irrevocable and
non-assignable; actuarially sound as determined in accordance with the
actuarial publications of the office of Chief Actuary of the SSA; and for payments in equal amounts
during the term of the annuity with no deferral and no balloon
payments. Unlike the DRA's state as beneficiary requirement (DRA
annuity rule "F"), these alternative DRA annuity exceptions (DRA annuity rule "G")
do not apply to annuities where the community spouse (the spouse not
receiving Medicaid long term care) is the annuitant.
Potential Problems for Structured Settlements - As von Saucken's article points out, if applicable to structured settlements, each of the
requirements set forth in the second DRA annuity rule "G" exception for
annuities creates potential problems:
- Irrevocable - one of the most important advantages of a structured
settlement annuity is its exclusion from federal income tax under IRC
section 104(a)(2). There is no apparent tax authority, however, for the
proposition that the IRS will treat an irrevocable structured
settlement annuity as non-taxable periodic payments under IRC section
104(a)(a). To the contrary, in multiple private letter rulings, the IRS
has stated that the owner of the structured settlement annuity must
maintain the right to change the beneficiary. Arguably, an
"irrevocable" structured settlement annuity creates actual receipt
of a present economic benefit.
- Non-assignable - Even prior to the DRA, state Medicaid
directors argued that the secondary structured settlement market
creates a legal presumption that structured settlement annuities are
saleable and therefore available and countable for purposes of Medicaid
eligibility. State courts have been divided on this issue. Although
structured settlement recipients might insist that anti-assignment
language be included in structured settlement documentation, it is
unclear what language will satisfy a state Medicaid administrator or
state court. At worst, the secondary market for structured settlement
means that: 1) all structured settlement annuities qualify as countable
assets for Medicaid eligibility; and 2) all structured settlement
annuities qualify as transfers for less than fair market value for
Medicaid's asset transfer rules. Significantly, however, when a
structured settlement annuity is irrevocably transfered to a special
needs trust, it is the trustee (not the beneficiary) who has the right
(if any) to sell or transfer the structured settlement payment rights.
- Actuarially Sound - The actuarially sound test appears in section
3258.9(B) of the CMS pre-DRA State Medicaid Manual as well as in
section 1917(c)(1)(G) of the DRA. Section 3258.9(B) includes two case
examples both involving term certain annuities. To be actuarially sound
under both the pre-DRA and DRA annuity requirements, von Saucken suggests that annuities now must be term certain and the payout term must be less than the
annuitant's life expectancy according to SSA life expectancy tables.
This actuarially sound Medicaid requirement appears to eliminate
two important advantages of structured settlement annuities: lifetime
payouts and age rated annuities.
- Annuity Payments in Equal Amounts with No Deferred or
Balloon Payments - This DRA annuity requirement would eliminate important
features typically incorporated in structured settlement annuities
including: percentage increases; step increases; deferred payments; and
deferred lump sums.
S2KM's next blog post (Inconvenient Questions - 2) will summarize and review Sylvius von Saucken's analysis of the arguments
for and against applying the DRA annuity requirements to structured settlements - including structured settlements
irrevocably assigned to special needs trusts. A third S2KM blog post
(Inconvenient Questions - 3) will consider the relevance and
significance of past "authority" from the SSA and CMS to the DRA structured settlement issues. In addition, Release 41 of "Structured Settlements and Periodic Payment Judgments" (available in April 2007) will feature a detailed analysis of the DRA.
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