Singleton v. Commonwealth of Kentucky: Federal Regulation Takes Precedence

Krause Financial has recently learned of a ruling out of the U.S. Court of Appeals for the Sixth Circuit regarding the language used to designate the State as a remainder beneficiary when utilizing a Medicaid Compliant Annuity (“MCA”). While several states require the State Medicaid agency to be named as the beneficiary for the amount of funds expended on behalf of the annuitant, 42 U.S.C. § 1396p(c)(1)(F)(i) states the State Medicaid agency must be named as remainder beneficiary for the amount of funds expended on behalf of the institutionalized individual. The difference in language may seem small, however the specific wording actually contains very significant implications.

Singleton v. Commonwealth Case Facts

In September of 2009, Mary Singleton purchased a Medicaid Compliant Annuity in order to qualify her husband, Claude Singleton, for Kentucky Medicaid benefits. In compliance with Kentucky Medicaid regulations, Mrs. Singleton wished to name the primary beneficiary as the State of Kentucky up to the amount of funds expended on behalf of the annuitant, namely, herself. She was then advised the annuity would not be considered Medicaid compliant unless the beneficiary designation was altered to conform with federal regulations. As such, Mrs. Singleton named the primary beneficiary as the State of Kentucky up to the amount of funds expended on behalf of the institutionalized individual, namely, Mr. Singleton.

Mr. Singleton was then able to obtain Medicaid benefits. Over the course of Mr. Singleton’s lifetime, the State of Kentucky paid $98,729.01 in Medicaid benefits on his behalf. After his passing, Mrs. Singleton’s annuity continued to pay out, as she was the owner/annuitant/payee of the contract. Upon Mrs. Singleton’s death in February of 2014, the remaining amount in the annuity was $118,238.41. Pursuant to the language in the primary beneficiary designation, the State of Kentucky was entitled to reclaim the balance of benefits paid of $98,729.01. The contingent beneficiaries – the Singleton children – received the remaining balance of $19,509.40.

The Singleton children sued the State of Kentucky, claiming the State was not rightfully entitled to the sum of $98,729.01 because Kentucky regulations allow for the State to be named beneficiary for the amount of funds expended on behalf of the annuitant when purchasing a MCA. Additionally, though federal regulation does require the “institutionalized individual” language, states have the ability to adopt less restrictive Medicaid policy than what is federally mandated. Therefore, Mrs. Singleton had the right to utilize the less restrictive beneficiary designation language under Kentucky regulations.

The Singleton children’s case was dismissed. The U.S. Court of Appeals for the Sixth Circuit found the State of Kentucky was entitled to the sum of benefits paid on behalf of Mr. Singleton under federal Medicaid law, specifically referencing the Supremacy Clause – federal law takes precedence over state law. Therefore, the “institutionalized individual” language is required for an annuity to be considered Medicaid compliant. Furthermore, the Court dismissed the claim that this case falls under the relevancy of the ability for states to adopt less restrictive Medicaid policy, stating this regulation is meant to extend Medicaid benefits to more people that would not otherwise be eligible, which does not apply to the specifics of beneficiary language in MCAs.

Just How Important is the Beneficiary Language?

The difference between naming the State as beneficiary for funds expended on behalf of the annuitant versus the institutionalized individual could be the difference between your client being eligible or ineligible for Medicaid benefits, and also greatly alters what the State is entitled to recover should the community spouse predecease the annuity term. According to Krause Financial Services’ records, nine states currently have state-specific MCA regulations that consist of the “annuitant” language. These states include Alabama, Alaska, Connecticut, DC, Hawaii, Iowa, Kentucky, South Dakota, and Tennessee. Given the decision in the Singletons’ case, KFS recommends planning conservatively by following the federal regulation and utilizing the “institutionalized individual” language when naming the State Medicaid agency as beneficiary.

If a community spouse is concerned about the State’s ability to recover funds after his or her passing, an alternative to the “annuitant” language is utilizing an annuity term shorter than the community spouse’s Medicaid life expectancy. While it is the opinion of KFS to never structure an annuity so short that it creates an unreasonable amount of income, it is possible to structure short-term annuities for community spouses. This way, the annuity will pay out more quickly, reducing the risk of the community spouse predeceasing the annuity term, and reducing the chance of the State recovering benefits from the annuity.

Contact Krause Financial today to learn more about your state’s beneficiary requirements and how they comply with 42 U.S.C. § 1396p(c)(1)(F)(i). Additionally, KF will be able to provide you recommended state-specific language for naming your State Medicaid agency as beneficiary in the appropriate position.

To read the full text of this decision, click here.