Massachusetts Estate Recovery: State Cannot Recover Against Community Spouse’s Annuity

An important consideration in any crisis planning case is the issue of estate recovery. Estate recovery is where the state attempts to recoup costs for services rendered under the State Medicaid program upon the Medicaid recipient’s death. A recent Massachusetts case, Dermody v. Executive Office of Health and Human Services, (Mass. Super. Ct., No 1781CV02342, Jan. 16, 2020), illustrated some limitations on estate recovery.

The case facts in Dermody are straightforward. Robert Hamel purchased a single premium immediate annuity (SPIA) in order to qualify his wife, Joan Hamel, for long-term care Medicaid benefits. Mr. Hamel named the Commonwealth of Massachusetts as the primary beneficiary on the annuity to the extent of benefits paid. It is important to clarify that this language did not specifically mention the institutionalized individual, Mrs. Hamel. Mr. Hamel named his daughter and the Plaintiff in this case, Laurie A. Dermody, as the contingent beneficiary on the annuity

Mr. Hamel, who had never received Medicaid benefits, subsequently passed away while Mrs. Hamel was in the nursing facility. The Commonwealth demanded payment under the terms of the SPIA for services rendered to Mrs. Hamel, even though she was not the owner or annuitant on the policy. The annuity company paid the Commonwealth for Mrs. Hamel’s long-term care and the Plaintiff sued both the Commonwealth and the annuity company claiming she was entitled to the remaining balance of the contract. The Court agreed.

In Dermody, the Plaintiff argued that because the annuity named the Commonwealth as primary beneficiary but only to the extent of benefits paid, and because Mr. Hamel did not receive benefits, that the Commonwealth was not entitled to payment under the annuity contract. Accordingly, the Plaintiff argued that she was then entitled to the remaining benefit under the policy as contingent beneficiary. The Court decided the case on summary judgment motion.

The decision in Dermody turned on the Court’s analysis of “the sole benefit rule” under 42 U.S.C. § 1396(c)(2)(B), which permits an asset transfer to a spouse so long as the transfer is for “the sole benefit” of that spouse. The Court placed the sole benefit rule in context, addressing the passage of the Deficit Reduction Act of 2005 (DRA) and the additional eligibility requirements added thereunder, specifically the language requiring that the state be named remainder beneficiary. The Court explained that if the annuity must satisfy both the sole benefit rule and the DRA beneficiary requirement that the Commonwealth would be entitled to the remaining benefit under Mr. Hamel’s annuity.

In determining that the Plaintiff was entitled to the benefits, the Court noted the absence of information identifying Mrs. Hamel on the annuity contract or application. The Court ruled that the plain language of the relevant statutory provisions was unambiguous and that any transaction satisfying the sole benefit rule is exempt from transfer penalty rules in 42 U.S.C. § 1396(c)(1), including the annuity rules in subparagraph (F) – which includes the beneficiary language.

In the Dermody decision, the Middlesex Superior Court noted the DRA “did not amend or revoke the sole benefit rule.” Where an annuity satisfies the sole benefit rule it does not have to comply with the DRA rules under § 1396p(c)(1)(F). More specifically, the Court ruled that because the requirements of subsection (c)(1)(F) apply to annuities not exempted by the sole benefit rule in paragraph (c)(2), the annuity purchased by a spouse who did not receive Medicaid benefits does not have to name the state as beneficiary. The Court clarified that the DRA requirements of (c)(1)(F) would apply to “annuities benefiting non-exempt children or a spousal annuity that is not actuarially sound.”

For purposes of crisis planning in Massachusetts, this case could have a significant impact. Synthesizing the Court’s decision, it is understood that where an annuity is purchased for the sole benefit of a Medicaid recipient’s spouse and that annuity is actuarially sound, it does not need to name the state as a beneficiary as required by the DRA rules in subsection (c)(1)(F). Essentially, if a Community Spouse were to purchase an annuity for their sole benefit, so long as it is actuarially sound it would not have to meet the other DRA criteria and beneficiary payments then become a matter of contractual rather than statutory interpretation.

This is a favorable decision for elder law attorneys in Massachusetts. If the need to designate the state Medicaid agency was eliminated in most annuity cases, this would pose an incredible opportunity for seniors to preserve their assets for the next generation. However, while this decision is favorable, it is important to maintain perspective until we better understand the weight it truly holds. In short, it is a trial-level decision without the authoritative heft of a state appellate or supreme court decision.

We will continue to monitor the impact of this decision closely. If you have any questions regarding this case, please contact our office.