Since the passage of the Deficit Reduction Act of 2005 (“DRA”), the Pennsylvania Department of Human Services (“Department”) has attempted to limit the use of annuities in the asset protection strategy known as “half-a-loaf” gifting.  Half-a-loaf gifting is a technique used to reduce a Medicaid applicant’s resources by gifting one-half of his or her resources to a family member, usually a son or daughter, and using the remaining one-half to purchase a DRA compliant annuity. The applicant becomes eligible for Medicaid because he or she has no resources and the Department imposes a penalty, based on the value of the gift, for the nursing home payments. However, because the purchase of a DRA compliant annuity is exempted from a penalty, the applicant uses the payment stream from the annuity to pay for his or her nursing home care until the penalty expires.  The result of which is the gifted amount is protected from payment of nursing home expenses.

Since 2005, the Department’s position was that the annuities used in half-a-loaf gifting were not DRA compliant. One criteria for an annuity to be DRA compliant is that the annuity be “actuarially sound.” Actuarially sound is not defined in the DRA but it is defined by CMS  guidance to the States for administration of the Medicaid Program.  The Department’s position was that an annuity must be equal to the applicant’s life expectancy.

On September 2, 2015, the United States Court of Appeals for the Third Circuit resolved the issue with its precedential opinion in Zahner vs. PA Department of Human Services. The Court’s opinion was a thorough rebuke of the Department’s position. The Court rejected the Department’s position that the annuities at issue in Zahner were not DRA compliant because their term of payment was too short. The Court further found that the Pennsylvania’s statute regulating annuities was unconstitutional. The Court held that the DRA created a safe harbor for complaint annuities and an annuity shall be considered compliant as long as its payment term is equal to or less than an applicant’s life expectancy.

Our elder law office previously was successful in federal court litigation on this issue in New Jersey federal district court.  However, we now have a federal appellate court decision on the issue of Medicaid compliant annuities.  Absent action from the United States Congress or the United States Supreme Court addressing this issue, the Zahner decision will remain the law of Pennsylvania, Delaware, the Virgin Islands, and New Jersey (the jurisdiction of the Third Circuit) for the foreseeable future.  Zahner’s impact will have a profound effect on long term care planning.  Half-a-loaf gifting via an annuity is now enshrined in the law.  Persons requiring nursing facility care will have an additional planning technique available to them that potentially can preserve a large portion of their assets to their family.  Some wealth will now remain within a family and not flow to an elderly parent’s nursing facility.

A half-a-loaf gift can expedite access to Medicaid benefits while preserving wealth within a family. However, before you consider the use of a Medicaid compliant annuity for long-term care planning, you should seek the counsel of an elder law practitioner to determine the correct plan for you and your family.