Elder Law FAX -- April 10, 2006

Balloon Annuity Counted as a Resource for Medicaid Eligibility Purposes
In November 1994, the U. S. Health Care Financing Administration (HCFA) released a policy document known as Transmittal 64. Transmittal 64 provided guidelines for state Medicaid caseworkers on how to evaluate the transfer of assets into trusts and annuities.

An annuity is a contract in which a person pays a bank or an insurance company a lump sum in return for fixed periodic payments. If the person dies during the term of the annuity, the remainder is typically converted into a lump sum and paid to a designated beneficiary.

According to Transmittal 64:
"Annuities, although usually purchased in order to provide a source of income for retirement, are occasionally used to shelter assets so that individuals purchasing them can become eligible for Medicaid. In order to avoid penalizing annuities validly purchased as part of a retirement plan but to capture those annuities which abusively shelter assets, a determination must be made with regard to the ultimate purpose of the annuity (i.e., whether the purchase of the annuity constitutes a transfer of assets for less than fair market value). If the expected return on the annuity is commensurate with a reasonable estimate of life expectancy of the beneficiary, the annuity can be deemed actuarially sound.
"The average number of years of expected life remaining for the individual must coincide with the life of the annuity. If the individual is not reasonably expected to live longer than the guarantee period of the annuity, the individual will not receive fair market value for the annuity based on the projected return. In this case, the annuity is not actuarially sound and a transfer of assets for less than fair market value has taken place, subjecting the individual to a penalty."

On January 31, 2002, 78-year-old Mary Fillbright, a resident in a long-term care facility, applied for Illinois Medicaid benefits. That day, she also bought a balloon annuity for $73,713. The annuity would stretch payments over her life expectancy of 116 months; it would pay her $188.94 per month: $10 per month principal, plus interest, for 115 months and $72,741.94 in its final month. The final or balloon payment represented nearly 99% of the purchase price.

Technically, this annuity is "actuarially sound" because it pays out over Ms. Fillbright's life expectancy of 116 months.

Nonetheless, Ms. Fillbright's application for Medicaid benefits was denied and a 22-month period of ineligibility for Medicaid imposed because the annuity violated Illinois' "equal periodic payment" regulation.

In 1999, the Illinois Department of Public Aid issued a regulation, stating that it (the DPA) "has become aware that the marketing of Medicaid planning devices sometimes includes plans offering back-end loaded annuities that pay only very small monthly amounts until the final month of life expectancy when a balloon payment reflecting the payout balance is made. Such annuity plans are intended to primarily benefit the person's heirs. While these annuities are literally consistent with current policy, they are in conflict with the intent of asset consideration for the purpose of equitable assistance eligibility determination." The regulation requires all annuities to pay benefits "in approximately equal periodic payments."

Ms. Fillbright argued that the regulation and the application of it to her case violated federal law and, specifically, Transmittal 64. The case wound up in the Illinois Supreme Court.

The Supreme Court observed that the purpose of Transmittal 64 is to discourage "abusive" sheltering of assets, not to punish legitimate retirement planning. Justice Fitzgerald, writing for the unanimous panel of judges, stated that the balloon annuity is not intended to provide retirement income to the annuitant. Rather, the annuitant would receive a disproportionately large payment on the last day of her life, when she would realistically be unable to spend it.

Upholding the lower courts' findings that the DPA was justified in denying her benefits, the court's opinion said, "The structure of a balloon annuity demonstrates that its purpose is to shelter assets and not to provide income."

Gillmore v. Illinois Department of Human Services, January 20, 2006.

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