Actuarial Soundness Does Not Equal Transfer for Fair Market Value

Written By: ElderLawAnswers.com
Last updated: Nov 30, 2004

The purchase of an actuarially sound annuity is held to be a transfer for less than fair market value because the purchaser failed to convince the court that she bought it for any other reason than to qualify for Medicaid. Bateson v. Ohio Dept. of Job and Family (Ohio Ct. App., 12th, No. CA2003–09–093, Nov. 22, 2004). unpublished decision

At age 87, Florence Bateson purchased a $100,000 commercial annuity. Under the annuity's terms, Mrs. Bateson will receive monthly payments of about $250 that will continue for 5.58 years, 30 days shy of her 5.79 year life expectancy. At this point, Mrs. Bateson will have the option to receive either a lump sum payment of $95,000 or the opportunity to reannuitize based upon her then–existing life expectancy. Mrs. Bateson, who designated her two children as the annuity's beneficiaries, opted not to select an alternate payment plan in which the monthly payments would include both principal and interest totaling nearly $20,000 a year.

[NOTE FROM ATTORNEY PAUL T. CZEPIGA: the problem here was the way the annuity was so heavily rear loaded. The kids certainly hoped mom would not live beyond her life expectancy so that they could collect the $95,000. The court essentially said "Who are you trying to kid here!?"]

Two months later, Mrs. Bateson and her husband moved to a nursing home, after which Mrs. Bateson applied for Medicaid benefits. Her application was granted but she was assessed a 25–month penalty period for an improper transfer of assets. The Medicaid agency found that Mrs. Bateson's health and condition created the strong likelihood that she would not live the average life expectancy. The trial court agreed and found that the annuity's ultimate purpose was to preserve the assets for her children. Mrs. Bateson appealed, arguing that the purchase of the annuity was not an improper transfer for less than fair market value because it was actuarially sound.

In an unpublished decision, the Court of Appeals of Ohio affirms. The court rules that just because an annuity is actuarially sound does not mean that the transfer is for fair market value. Holding that "[n]o value is received by payments of interest only," the court says it must examine the ultimate purpose of the annuity and concludes that Mrs. Bateson has been unable to show that it was for anything other than to qualify for Medicaid. In reaching this conclusion, the court points to the possibility of perpetual re–annuitization with monthly interest–only payments and to Mrs. Bateson's rejection of the alternate payment plan, which offered a way for her to pay for her nursing home care.

To download the full text of this decision in PDF format, go to:
http://www.sconet.state.oh.us/rod/newpdf/12/2004/2004–ohio–6247.pdf.
(If you do not have the free PDF reader installed on your computer, download it here.)