Pennsylvania Commonwealth Court Holds Structured Settlement Annuity Is Transfer for Less Than Fair Market Value Under the Deficit Reduction Act

Contributed by Nora Gieg Chatha

The Pennsylvania Commonwealth Court’s recent decision in the matter of Sams v. Department of Public Welfare may significantly affect the structured settlement industry, and the settlement of lawsuits on behalf of certain Medicaid or Medical Assistance-Long Term Care recipients in Pennsylvania.  Under Sams, it appears the requirements of the Deficit Reduction Act of 2005 will apply to the purchase of qualifying structured settlement annuities.

 

Annuities are common planning tools that can effectively convert otherwise excess resources into an income stream without a penalty period for a transfer for less than fair consideration.  Under the Deficit Reduction Act of 2005 (DRA), an annuity (other than those funded with qualified retirement plan assets) will generally not be treated a transfer for less than fair consideration if it:

 

  • Is irrevocable and non-assignable
  • Is actuarially sound
  • Provides for payments in equal amounts with no deferral or balloon payments
  • Names the state as remainder beneficiary (subordinate to the preferred interest of the community spouse and minor and disabled children) to the extent of benefits paid

 

The Centers for Medicare & Medicaid Services (CMS) has specified that “actuarial soundness” requires the expected return on an annuity to be equal with a reasonable estimate of the beneficiary’s life expectancy based on actuarial tables.

 

Considerable litigation and court decisions have addressed various aspects of DRA annuities, but Sams is one of the first cases in Pennsylvania to address the DRA’s application to structured settlement annuities in the litigation context.

Dustin Sams filed a personal injury action seeking damages for a brain injury he suffered after being hit by a car while riding his motorcycle.  Mr. Sams agreed to receive a structured settlement annuity as part of the settlement of his personal injury case against the driver.  Although Mr. Sams settled his case in 2008, the structured settlement annuity payments did not begin until February 2012, at which point Mr. Sams began to receive monthly payments of $967.23, subject thereafter to an annual increase of 3 percent each year for the first 30 years of his life. The annuity named Mr. Sams’ mother as the primary beneficiary and his sister as the secondary beneficiary.

Prior to the settlement of his lawsuit Mr. Sams had been receiving Supplemental Security Income (SSI) and MA Home and Community-Based Services.  Mr. Sams lost his SSI benefits after the lawsuit due to his increased income from the annuity and, as a result, he had to reapply for MA benefits.  The Pennsylvania Department of Public Welfare (DPW) determined that Mr. Sams was eligible for MA, but assessed a 28-month penalty period of ineligibility for MA-LTC services because it considered Mr. Sams’s structured settlement annuity to be a transfer of assets for less than fair market value.

An administrative law judge upheld the DPW’s decision and Mr. Sams appealed to the Commonwealth Court, arguing in part that he never had actual or constructive receipt of the $232,474.15 such that he could not have “transferred” assets through the annuity’s funding.

The Commonwealth Court upheld DPW’s imposition of the penalty period. The Court found that “[t]hough Sams was never in actual possession of the $232,474.15 used to purchase the annuity on his behalf, Sams has at all times been entitled to this settlement money, and, thus, the record supports DPW’s determination that the annuity is Sams’ asset.” The Court went on to find that the purchase of the annuity was not compliant with the requirements of the DRA, and therefore represented a transfer for less than fair market value because the annuity did not make equal payments for its duration, deferring payment between 2008 and 2012, and did not name the state as the primary beneficiary.