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Lewis v. Alexander (E.D. Pa. 2011)
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Federal court invalidates portions of Pennsylvania’s law regulating special needs trusts
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A federal court has overturned large portions of the Pennsylvania law regulating Special Needs Trusts. This type of trust, sometimes also referred to as a "Supplemental Needs Trust", or "SNT", is used by recipients of needs-based public benefits, such as Medicaid or Supplemental Security Income (SSI). An SNT allows the trust beneficiary to receive and retain an inheritance or other lump sum without losing his or her benefits. The trust fund becomes an extra or "supplemental" source of support available to provide for one's extra or "special" needs not otherwise affordable. An SNT enables an incapacitated public benefits recipient to rise above poverty level existence to an enhanced quality of life.
But up until now those in Pennsylvania faced substantially greater limitations than federally mandated,
in situations where the trust was funded with the beneficiary's own money. Those expanded limitations included a requirement that trust distributions have a "reasonable" relationship to the needs of the beneficiary, that the beneficiary have special needs that could not be met without the trust, that one form of SNT, a "pooled" trust, could only be established for persons under age 65, and, perhaps most onerous of all, that Pennsylvania's Department of Public Welfare (DPW) could petition the court to terminate the trust if it felt that these restrictions were not being followed or the trustee was simply not making distributions to DPW's liking. In striking down these provisions, located in Section 1414 of Pennsylvania's Public Welfare Code, the court noted: "Medicaid is no exception to the general rule that state laws that conflict with federal laws are preempted." Families of incapacitated persons should seek professional guidance, including drafting and funding an SNT. For more information on SNTs, contact Vasiliadis & Associates. Stanley Vasiliadis is a member of the Academy of Special Needs Planners (ASNP). |
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In Re: Slomski, 987 A. 2d 141 (Pa. 2009).
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Agent under power of attorney has authority to change beneficiary designation on a retirement plan despite absence of gifting authority .
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In 2000 Ronald Slomski signed a Power of Attorney naming his mother, Rita Slomski, as agent. The POA authorized Rita to, among other things, “engage in retirement plan transactions”. Five years later, Ronald designated his wife primary beneficiary of his $190,000 retirement account and named his two stepdaughters as contingent beneficiaries. Ronald’s wife subsequently passed away in July 2006. Later that year, while Ronald was apparently suffering his final illness, Rita used the POA to name her other children as beneficiaries of the retirement account in place of Ronald’s stepdaughters. Ronald’s will named his stepdaughters beneficiaries of his estate. But the retirement account, being a non-probate asset, did not pass through the will.
The stepdaughters sued, seeking to invalidate Rita’s change of beneficiary. They argued that the POA did not authorize Rita to change beneficiaries. Such a change, they explained, constituted a gift of a substantial part of Ronald’s assets and the POA failed to expressly delineate her gifting powers, as required by Pennsylvania statute. The Pennsylvania Supreme Court rejected the stepdaughters’ claim. In so doing, the court pointed out that the statutory definition of the phrase, “engage in retirement plan transactions”, includes all powers with respect to retirement plans that the principal has. Under the retirement plan, Ronald had authority to change beneficiaries. The facts in this case appear to suggest that Rita abused her authority by acting contrary to the apparent desire of her son to benefit his stepdaughters. Had they argued a breach of fiduciary duty by Rita to act in good faith, the outcome may have been different. |
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In Re: Novosielski, No. 35 WAP 2008,
Decided March 25, 2010 (Pa. 2010)
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In a long awaited decision, the Pennsylvania Supreme Court has ruled on the issue of whether a will trumps conflicting provisions of a joint account.
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| Alice Novosielski, a 79-year old widow with no children, died with a will leaving her estate in equal shares to her five sisters. At some point after signing her will, and in deteriorating health, she purchased a Treasury bill tender in joint names with her nephew. The account was funded with $500,000, the bulk of Alice’s estate. The sisters, Alice’s beneficiaries under her will, sued. Westmoreland County Orphans’ Court and, on appeal, the Pennsylvania Superior Court, agreed with the sisters that the joint account should be distributed to them in accordance with the terms of the will. But the Pennsylvania Supreme Court overruled the Superior Court, thereby allowing the bulk of Alice’s estate to pass to the nephew as the surviving co-owner. It held that a person has a right to fund a joint account in whatever manner desired and that a pre-existing will to the contrary does not, without more, invalidate the joint account. |
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WEATHERBEE V RICHMAN, (07-134, Erie, PA)
(Jan. 22, 2009)
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Federal Court in PA (Western District) Rejects latest attempt by Pennsylvania Department of Public Welfare to prohibit use of annuities in Medicaid planning
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Backround. A significant obstacle to use of immediate annuities for Medicaid planning for married couples has been eliminated with yet another federal court decision. On January 22, 2009 a Federal District Court rejected the claims of Pennsylvania’s administrative agency that recent changes in both state and federal law prohibit the use of annuities as a Medicaid planning strategy. This decision follows on the heels of a recent Third Circuit Court of appeals decision, James v. Richman, a summary of which was recently posted on this site.
Case Summary. Adeline, the wife of a nursing home resident, paid close to $400,000 of the couples’ assets to buy for herself an immediate annuity. The annuity yielded monthly payments of over $4,400 for a period of time equal to Adeline’s life expectancy. By its terms, the annuity was irrevocable, non transferable and the beneficiary designation could not be changed. Ted, Adeline’s husband, thereafter applied for Medicaid benefits to pay for the cost of his nursing home care. His request was denied by the Pennsylvania Department of Public Welfare (DPW). It asserted that the value of the couples’ assets exceeded the maximum allowed for Medicaid eligibility. Specifically, DPW claimed that Adeline had the ability to sell the stream of income derived from the annuity and that the annuity was therefore an asset, not income. Under Medicaid rules, a community spouse of a Medicaid recipient need not pay over her income toward the cost of her spouse’s nursing home care. Adeline sued in federal court. The court overruled DPW’s denial. The judge agreed with Adeline that the annuity was income, not an asset, and that recent changes in both federal and Pennsylvania law do not prohibit a married couple from converting assets into an exempt income stream for the spouse of a Medicaid applicant. |
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James v. Richman (U.S C.A. 3d Cir. No. 06-5092)
(Nov. 12, 2008). |
Pennsylvania’s Department of Public Welfare (DPW) has been rebuffed in its efforts to overturn a lower court ruling regarding the use of spousal annuities as a Medicaid planning tool.
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Backround. An immediate annuity can be described as life insurance in the reverse. With life insurance, one typically makes monthly payments (premiums) to a life insurance company. When the insured dies, the company issues a lump sum death benefit. With an immediate annuity, the owner, pays a lump sum to the life insurance company and thereafter receives monthly payments for life or for a fixed term. Under the right circumstances a married nursing home resident seeking to qualify for Medicaid benefits to pay for his or her care can hasten eligibility by using such an annuity. Specifically, excess at-risk assets that otherwise would be paid over to a nursing home can be converted into an exempt stream of income to the Medicaid applicant’s community spouse.
Case Summary. When her husband entered a nursing home in August 2005, Josephine James purchased a $250,000 single premium immediate irrevocable annuity. The actuarially sound annuity (payout term not longer than Mrs. James’s life expectancy) included an endorsement that "[t]his Contract may not be surrendered, transferred, collaterally assigned, or returned for a return of the premium paid. This Contract is irrevocable and has no cash surrender value. An Owner may not amend this Contract or change any designation under this Contract."
The purchase of the annuity, combined with the purchase of an automobile, reduced the couples' countable assets to within Medicaid resource eligibility limits. But, when Mr. James subsequently applied for Medicaid, his application was denied. DPW took the position that Mrs. James's annuity was a countable asset or “available resource” because her right to receive income from it could be sold by her. In support of this position, DPW eventually produced a declaration from a finance company that expressed interest in purchasing the payments from Mrs. James's annuity for $185,000.
Relying on Medicaid law and Supplemental Security Income (SSI) regulations, the U.S. Court of Appeals for the Third Circuit held that DPW cannot treat Mrs. James's annuity as an available resource. It explained that in determining whether an annuity may be treated as a resource a state cannot use a methodology that is more restrictive than that used by SSI. In this case, the court found that Mrs. James lacked the legal power to change ownership in her annuity without breaching the annuity contract. Therefore, it concluded, the annuity cannot be treated as an available resource.
The James case involved an annuity purchased before enactment of the Deficit Reduction Act (DRA), on February 8, 2006. DPW continues to oppose the use of spousal annuities, relying upon a new provision contained in the DRA. A case challenging that position is currently pending in federal district court.
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