By Alan Polack
Here is a rare bird.
It is a published Court of Appeals decision resulting from an appeal from the Department of Human Services regarding Medicaid eligibility.
The case name is Mackey v Department of Human Services, No. 28896, decided on September 7, 2010.
It appears that Elizabeth Marden was a resident of a nursing home in Grand Traverse County.
Her daughter, and attorney-in-fact, engaged in some planning in order to qualify her mother for medical assistance benefits.
She formed the Marden Family LLC, assigning 100 investment (non-voting) units and all 100 voting units to herself.
She then assigned 111,460 investment units to her mother for which her mother paid the LLC $111,460.
On the same date, the daughter, as the sole voting member of the LLC, acted to disallow any transfer of investment units during a two year holding period; therefore, under the LLC’s Operating Agreement, the mother could not sell, transfer or liquidate her units for two years from the date of investment without a super majority of the voting members.
After two years, she could sell the units and was guaranteed two percent interest from the date of purchase of the units.
During the two years, mother would not receive any payments from the LLC.
In September of 2007, mother applied for Medicaid with the Michigan Department of Human Services (DHS).
The DHS worker determined that the mother was eligible for Medicaid, since she was below the asset limit of $2000 but imposed what is known as a divestment penalty for a period of 18 months and 23 days.
The worker followed the guidelines in the DHS Program Eligibility Manual (now the Bridges Eligibility Manual) item 405. The penalty period is computed by dividing the amount of the divestment by a number known as the penalty divisor ($5938 in 2007).
Although eligible for Medicaid, the mother could not receive benefits for a period of 18 months and 23 days.
The daughter then requested a hearing before the DHS Administrative Law Judge (ALJ) to review the worker’s decision.
The ALJ found that because (1) mother’s investment in the LLC was within the five year look-back period; (2) the investment in the LLC was made unavailable for two years; and (3) that the investment was for less than fair-market value, it was a divestment.
Under the Michigan Administrative Procedures Act, the daughter appealed the ALJ’s decision to the Grand Traverse Circuit Court.
After reviewing the ALJ’s decision, the circuit court found that the mother’s purchase of the LLC shares was not a divestment because she did, in fact, receive fair market value for her money.
Apparently the circuit court accepted the mother’s argument that she was simply converting the proceeds from certain annuities that she had purchased earlier to stock in the family LLC.
At any rate, the court ruled that the mother was entitled to Medicaid benefits without penalty. The DHS applied to the Court of Appeals for leave, which was granted on March 18, 2009.
The Court of Appeals then examined some of the statutory history of Medicaid.
They first looked at the provisions of OBRA 1993 which established the framework for states to promulgate rules regarding the treatment of transfer of assets.
At that time, Congress mandated a look back period of three years from the date of application for Medicaid to determine if the applicant had made any transfers solely to become eligible for Medicaid.
In practice, the state treats all transfers within the look back period as transfers made to become eligible for Medicaid.
The rules established that if a person disposed of assets for less than fair market value during the look back period, the person is ineligible for Medicaid for a statutory penalty period based on the value of the assets transferred.
Under the 1993 rules, the penalty period began on the date of the transfer.
Divestment rules were drastically changed by the Deficit Reduction Act of 2005 which took effect in February of 2006.
Under the new rules, the look back period was extended from three years to five years and divestment penalty periods did not begin running until the applicant was a resident of a nursing home and otherwise eligible for Medicaid.
Those are the rules the court had to review in this case. The court framed the principle issue here as whether or not the mother’s investment of all $111,460 in the LLC formed by her daughter constituted a divestment.
The court first alluded to the daughter’s admitting she created the LLC and transferred her mother’s assets into it for the sole purpose of qualifying for Medicaid benefits.
The court then embarked on a detailed discussion of what fair market value is.
It referred to the Black’s Law Dictionary definition of fair market value as the price that a seller is willing to accept and a buyer is willing to pay on the open market and in an arm’s length transaction.
An arm’s length transaction is defined as related to dealings between two parties who are not related ... and who are presumed to have roughly equal bargaining power; not involving a confidential relationship.
The court recognized that family members deal with each other and financial matters differently than they do with strangers in arm’s length transactions.
Without guidance from Michigan case law, the court turned to the Wisconsin Court of Appeals in Buettner v Department of Health and Family Services, 2003 WI App 90; 264 WIS 2d 700; 663 NW2d 282 (2003).
That court held that a purchase of a balloon annuity from close relatives constituted a divestment because the transfer was for less than fair market value.
In Buettner, the Medicaid applicant and her spouse purchased two irrevocable balloon annuities from their children that were non-assignable and unsecured and were private financial instruments that paid a rate of return of less than one percent, with exceptionally low monthly income payments of $50 per month.
The court found that this was not an arm’s length transaction because nobody in their right mind would give a third party $200,000 for this type of annuity.
The court went on to examine other Medicaid qualification plans which involved the transfer of assets to family members.
Two courts in Pennsylvania found that these plans involving large sums of money in exchange for low monthly payments followed by balloon payments were not fair market value transactions.
Returning to the instant case, the court held that the mother’s purchase of shares in the family LLC that was:
1. Unsecured;
2. Operated exclusively by her daughter/attorney-in-fact;
3. Not an approved investment vehicle under the DHS rules;
4. An arrangement which rendered the shares unavailable and nonassignable;
5. Not actuarially sound;
6. Not providing any distributions to petitioner during the two year period;
7. Purchased specifically to make petitioner eligible for Medicaid.
did not qualify as an “arm’s length” transaction. Therefore, the shares were purchased for less than fair market value and subject to the divestment penalty.
The court did distinguish this transaction from the purchase of commercial annuities which was allowed in Michigan and elsewhere for a number of years.
In fact, the trial court has relied in part on Mertz v Houston, 155 F Supp 2d 415, which recognized valid commercial annuities. It should be noted that current DHS rules specifically prohibits balloon annuities (BEM 406, pp 4-5).
As of March 1, 2010, BEM 405, p 2, provided that a transfer to an LLC is a divestment unless the client retains the rights to the asset or income invested and may withdraw the asset invested on demand.
———————————
Alan F. Polack specializes in elder and probate law and practices out of Shelby Township. He is a former president of the Macomb County Probate Bar Association.
