Last week, a federal judge in Erie, Pennsylvania issued a decision that is a 45̊ turn to the right in Medicaid law. In Zahner v. Mackereth, she held that five-year annuities are legitimate planning tools to help shield excess assets to qualify nursing home residents for Medicaid; but she ruled that short-term annuities of 12, 14 and 18 months were improper sham transactions engineered solely to effect Medicaid eligibility. While this decision leaves open planning opportunities for middle-class individuals with net worth over $500,000, it is a poke in the eye to those who are less wealthy. If upheld by the U.S. Third Circuit Court of Appeals, the ruling will be another aberrant decision by a fickle federal circuit.
Apart from specialized courts like the U.S. Tax Court and the secret Foreign Intelligence Surveillance Act Court, there are three levels to the federal court system: district, circuit, and Supreme. The district court is the trial court. There is at least one district court in each state or commonwealth, plus Guam, the Virgin Islands and the District of Columbia. Eleven regional circuit courts of appeals, the District of Columbia Circuit and the Federal Circuit comprise the first level of appeal from a district court. The U.S. Supreme Court reviews circuit court of appeals decisions that the justices consider important enough to warrant Supreme Court consideration.
The Third Circuit Court of Appeals hears cases from Delaware, New Jersey, Pennsylvania and the Virgin Islands. There are 24 judges on the court, who hear most cases in panels of three judges. District judges also may be called up to hear cases at the court of appeals, so there are hundreds of possibilities for what three judges might hear a particular case. Decisions are considered to establish precedent. Panels hearing later cases are expected decide issues in accord with earlier decisions by other panels, that does not always happen and the Third Circuit has issued some bogus opinions in the Medicaid arena. Several of these opinions appear driven by a desire to make it as difficult as possible to qualify for benefits, despite what federal Medicaid law allows.
In most regions of the nation, the spouse of a person in a nursing home can use either a trust or an annuity to preserve assets while qualifying the institutionalized spouse for Medicaid. This is because federal law provides that a person in a nursing home “shall not be ineligible for medical assistance . . . to the extent that . . . assets were transferred to the individual’s spouse or to another for the sole benefit of the individual’s spouse, [or] were transferred from the individual’s spouse to another for the sole benefit of the individual’s spouse.” 1396p(c)(2)(B). Furthermore, no income of the community spouse shall be deemed available to the institutionalized spouse. 1396r-5(b)(1). These two rules clearly authorize the creation of an irrevocable trust to shelter assets for the “Community Spouse.”
However, in an obtusely reasoned opinion, the Third Circuit Court stated, “Once the community spouse receives [irrevocable trust] payments, there is nothing preventing her or him from sharing them with the institutionalized spouse as well.” Johnson v. Guhl, 357 F.3d 403, 408 (3rd Cir. 2004). The court was saying that a properly drafted irrevocable trust would not shelter assets.
In Guhl, the plaintiffs were correctly arguing that they would not be required by federal law to “share” the payments with their institutionalized spouses, and they did not want to. The court’s rationale is ridiculous. It is like ruling in a tax case that the taxpayer who claims he or she is not liable for the tax should pay it anyway, because there is nothing preventing the taxpayer from sharing the money with the government.
Four years later, a different panel held that an annuity which has been used to turn an asset into an income stream is not an available asset and the Community Spouse is neither obligated to share the distributions nor to offer the income stream for sale on a secondary market. James v. Richman, 547 F.3d 214 (3rd Cir. 2008). The court stated that requiring the community spouse to share would undermine the rule that “no income of the community spouse shall be deemed available to the institutionalized spouse.” Id. at 219. This decision clearly contradicts Johnson v. Guhl, but did not specifically overrule the earlier case. Therefore, irrevocable spousal annuity trusts are not used in Delaware, New Jersey or Pennsylvania, while annuities are used.
Still another panel of the Third Circuit ruled in 2011 that promissory notes authorized by the Deficit Reduction Act of 2005 may not be used to create Medicaid eligibility if they are between family members. Sable v. Velez, 437 Fed.Appx. 73, 2011 WL 2689016 (3rd Cir. 2011). The effect of this decision is to make it more difficult for low net worth Medicaid applicants to preserve a small amount of their estate, while higher net worth applicants can use annuities for estate preservation.
This latest Medicaid case punishing the impecunious was decided by a Pennsylvania federal district judge. As mentioned, she held that 12-, 14- and 18-month annuities were sham transactions, while 60-month or longer annuities are permissible. Zahner v. Mackereth, 11-cv-306 (Slip. Op. January 14, 2014). Again, this decision only hurts low net worth individuals and families, since a five-year annuity can usually be used when the amount to be protected is over $250,000. This decision will likely be appealed. If the judgment is affirmed, it will be one more poorly reasoned opinion, drafted to inhibit Medicaid applicants from exercising their rights under federal law.
If a taxpayer relies on provisions in the tax code in filling out a tax return, no federal or state judge will rule against him or her. Even if the taxpayer carefully constructs a transaction for the sole purpose of avoiding a tax, that is considered a proper exercise of the taxpayer’s rights. However, if a Medicaid applicant carefully follows the Medicaid rules in preserving as much as legally allowed when applying for benefits, there is no guarantee that the court will not decide that it is a “sham transaction” because the applicant followed the rules too carefully! That is like ticketing a driver for driving at the precise speed limit or prosecuting a hunter for bringing in the exact limit of quail.
Some judges tilt the playing field against Medicaid applicants. They invoke “public policy” or call a transaction a “sham” for no other reason than that they consider the result too favorable to the citizen.
Judges must decide cases based on the law and must not apply public policy or other considerations unless there is an ambiguity. According to Alexander Hamilton, “The courts must declare the sense of the law; and if they should be disposed to exercise WILL instead of JUDGMENT, the consequence would equally be the substitution of their pleasure to that of the legislative body.” Hamilton, The Federalist Papers, No. 78. Johnson, Sable and Zahner are improper “political decisions” in which the judges applied their personal prejudices instead of the law. A more rigorous discussion of Medicaid planning ethics and a judge’s proper role may be found here.
Medicaid rules are complicated and onerous, but the citizen has the right to any advantage compliance with the law yields. The fundamental right of the citizen to direct his or her financial affairs within the parameters of the program should be the court’s focus in deciding cases that involve Medicaid planning, not the state’s desire to avoid granting benefits.
John B. Payne, Attorney
Garrison LawHouse, PC
Dearborn, Michigan 313.563.4900
Pittsburgh, Pennsylvania 800.220.7200
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