It has become commonplace for a person whose spouse is in a nursing home to purchase an immediate annuity with the so-called “excess” assets when applying for MassHealth. The payments are not treated as excess assets, but instead are treated as the community spouse’s monthly income. In Dermody v. Executive Office of Health and Human Services, 491 Mass. 223 (2023), the Supreme Judicial Court (“SJC”) has ruled that the community spouse who purchases such an annuity must name the Commonwealth of Massachusetts as the beneficiary which will receive the remaining payments if the community spouse dies before receiving all of the annuity payments. According to the opinion, the Commonwealth is limited to collecting reimbursement from the annuity payments for the MassHealth benefits received by the institutionalized spouse.

The SJC had the briefs of the parties for over a year before issuing this decision, yet provided very little intellectual analysis of the federal Medicaid law, especially where a federal court had reached the opposite conclusion in a deeper reading of the federal law in 2013. The SJC seems to have begun deciding the case by assuming, without actual evidence, that it knew the purpose of the part of the Deficit Reduction Act (DRA”) that dealt with annuities and other asset transfers. There had been some generic floor statements about the DRA from politicians when it was passed, but nothing specific about annuities, and there was no legislative history of the DRA to justify the SJC making this shockingly lazy, pivotal assumption. Unfortunately, unless someone decides to take a similar case to the federal court system, this decision will be the final word on annuities purchased in Massachusetts by community spouses.

The Dermody decision still leaves community spouses with several options, including:

  1. Where most immediate annuities tend to be for 5 years, the community spouse could take the chance that he/she will survive the 5 years or opt for a shorter term. There are companies that sell annuities that return all payments within 2 years, and some that may go even shorter. It probably makes sense to go with the shortest payment feasible, but consider that if a large IRA is being annuitized, a short annuity may increase the overall federal income taxes payable.
  2. The community spouse could enter into a promissory note agreement with a family member that mimics the 5-year annuity payout. (As I had pointed out to the SJC in my brief in the case accompanying Dermody, the DRA had opened the door to the purchase of promissory notes that had no required payout to the state. This is why it was foolish for the SJC to have jumped to the lazy conclusion that it knew what the legislative purpose of the entire DRA was.)
  3. As is routinely done in Michigan, an “SBO” Trust could be created and funded with the so-called “excess” assets. The mandatory payouts from the trust to the community spouse would mimic an annuity payout.
  4. Spousal refusal was included in the 1988 federal law that created the community spouse resource allowance. The community spouse must disclose all assets under the regulations of the MassHealth agency, but then can simply refuse to spend the excess assets. While the MassHealth agency would technically have the right to sue the community spouse for the support of the institutionalized spouse, it never has done so to date, and such an event would seem unlikely unless an extremely wealthy person attempted to utilize this strategy.