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Department of Community Health Issues Proposed Policy on Annuities

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Issue 27, Spring 2005

Department of Community Health Issues Proposed Policy on Annuities
by Alison Hirschel, MPLP Elder Law Attorney

Recently, the Michigan Department of Community Health (DCH) issued a proposed policy governing the treatment of annuities for the purpose of qualifying for Medicaid. See Project No. 0502-HCEP, available at http://www.michigan.gov/documents/0503-HCEP(PC)_119453_7.pdf. According to the summary, the policy was sparked by an increase in the use of annuities to "artificially impoverish a person in order to qualify for Medicaid long-term care." It was to be effective June 1, 2005.

The proposed policy defines an annuity as "A written contract, usually with an insurance company, establishing a right to receive specified, periodic payment for life or for a term of years. They are usually designed to be a source of retirement income." Proposed Policy at 7. The proposed policy states that the purchase of an annuity is considered a transfer for less than fair market value unless:

* The annuity is commercially issued by an agent licensed in the State of Michigan, and

* The annuity is irrevocable, and

* The annuity returns the principal and interest within the purchaser's life expectancy, and

* The annuity payments must be equal monthly payments starting with the first payment and continue for the term of the payout (i.e. no balloon or lump sum payments), and

* The State of Michigan receives all amounts remaining in the annuity upon the death of the individual up to the amount equal to the total medical assistance paid on behalf of the individual by the Medicaid program.

Id. at 10 (emphasis added). The policy also states that any annuity purchased after the individual's retirement from employment will be considered solely for the purpose of establishing eligibility for Medicaid. Id.

The proposed policy provoked significant criticism and comments by members of the State Bar Elder Law and Advocacy Section (ELAS). Some members agreed, however, that there was cause for concern about unscrupulous salespeople who use scare tactics to sell annuities with balloon payments and very high commissions to seniors. Thus, the Section decided to support the elimination of balloon annuities. However, members of the Section also concluded that requiring the state to be a remainder beneficiary is illegal, and that other language in the proposed policy was contrary to state or federal law and/or confusing and poorly conceived.

ELAS representative Doug Chalgian, an attorney in private practice in East Lansing, met with DCH representatives in early April to express concerns and attempt to come to agreement about particularly troubling provisions. The section and individuals also submitted comments on the proposed policy. Comments were due on April 22.

The Department must now consider all the comments and determine whether to issue the policy as proposed, revise the policy, or let the matter drop. Given the State's interest in closing what it believes to be loopholes in Medicaid eligibility to save Medicaid funds, it is likely DCH will proceed with issuing some form of the policy this year. Advocates should alert clients both to the risks posed by exploitative annuity salespeople and to the potential change in the treatment of these assets.