Annuity DRA Compliance

Posted by Sylvius von Saucken

Question:
Does an annuity purchased as part of a settlement for a 20 year old plaintiff in a medical malpractice case that will be assigned to a (d)(4)(A) trust need to be DRA-compliant? I am particularly interested in your view about unequal payments (a future bump up in the annuity).

Thanks.
Vermont Attorney

Answer:
Generally, whether or not an annuity needs to be DRA-compliant when paid to a private special needs trust will depend on the state's annuity rules. For example, in Ohio, this question has been raised at an administrative appeals level, and the Ohio DJFS has opined that because a structured settlement annuity is not an asset of the special needs trust, that it is to be counted separate and apart from that of the trust's other non-annuity assets.

At the same time, arguments exist that the DRA's annuity rules are not intended to apply to third party funds used to purchase structured settlement annuities for the benefit of a long-term care beneficiary.

This brings us to a core issue - what type of Medicaid benefits does the 20 year old receive? If Aged, Blind or Disabled Medicaid, arguably, the DRA does not apply anyway, because the transfers of asset rules in general, are only intended to apply to long-term Medicaid. The DRA itself, under 42 U.S.C. Section 1396(p)(c)(1)(G), only applies to annuities purchased by or for an individual who has applied for long-term care Medicaid as noted below:

"(G) For purposes of this paragraph with respect to a transfer of assets, the term “assets” includes an annuity purchased by or on behalf of an annuitant who has applied for medical assistance with respect to nursing facility services or other long-term care services under this subchapter unless—"

So, if the disabled 20 year old is not receiving nursing facility or other long-term care services, the DRA's annuity design rules would not apply.

Presuming no other exceptions for DRA application exist, if the DRA applies to annuities used to fund special needs trusts, then unless state law provides otherwise, the annuity will have to meet the rest of the (G) tests, namely that the annuities be:

(1) Irrevocable and nonassignable;
(2) Actuarially sound (as determined in accordance with actuarial publications of the Office of the Chief Actuary of the Social Security Administration); and
(3) Provide for payments in equal amounts during the term of the annuity, with no deferral and no balloon payments made.

For example, in Ohio, an annuity includes a fixed payment or a payment for a term of years, and specifically permits a commutation of the annuity payments upon death if the annuitant dies within a guaranteed period. Ohio, then has defined the annuity rules, even for annuities purchased or changed after Feb. 8, 2006 as only requiring such immediate pay, fixed amounts, paid over the expected life expectancy with no deferral or balloon payments to include only payments made during the annuitant’s life. Otherwise, the accelerated payments made at death (to help pay for estate taxes as a rationale) would be considered an accelerated payment.

The challenge then, is to determine what your state would do to unequal payment amounts. Absent going to a state fairness hearing or arguing in state court, if the true objective is to protect state (long-term) Medicaid benefits, we would recommend taking a conservative approach and not designing an annuity, even if payable to a private or pooled special needs trust as able to make staggered, unequal lump sum or otherwise non-equal payments absent approval from the client’s case worker, and in some instances, without a letter from the state’s Medicaid policy experts (typically an in-house attorney at the state Medicaid offices), or an Asst. Attorney General for the state.

Please let us know if you have any follow up questions. (This answer is for educational purposes only, and does not constitute legal advice. You should seek legal counsel in your state to further discuss the concepts discussed herein and their application to specific fact patterns.)

Our best,
Sylvius von Saucken