Rеspondent, the Department of Human Services (DHS), appeals on leave granted the circuit court order reversing the hearing referee’s decision that the DHS properly imposed a Medicaid benefit divestment penalty on petitioner, Elizabeth Marden.
I. FACTS AND PROCEEDINGS
The underlying facts are not in dispute. On November 29, 2005, petitioner and her husband applied for Medicaid, but they failed to disclose сertain annuity contracts they held, which, had they been disclosed, would have rendered them ineligible for Medicaid benefits. On November 9, 2006, Mr. Marden died. Shortly thereafter, petitioner’s case was due for redetermination, but was closed when she failed to return the required form.
On January 11, 2007, petitioner again applied for Medicaid, but was denied eligibility the following June because she had too much money in her bank account. After her second application had been denied, petitioner received close to $100,000 in payouts as a result of her husband’s death. In preparation for submitting a third request for Medicaid benefits, petitioner’s daughter and attorney-in-fact, Betsy Mackey, formed the Marden Family L.L.C. Mackey was assigned, in her own name, 100 investment (nonvoting) units of the L.L.C. and all 100 voting units. Petitioner was assigned 111,460 investment units, for which she (through Mackey’s power of attorney) paid the L.L.C. $111,460. The same day, Mackey, as sole voting member of the L.L.C., acted to disallow any transfer of investment units during a two-year holding period. Thus, under the L.L.C.’s operating agreement, petitioner could not sell, transfer, or liquidate her units for two years from the date of investment without a supermajority of the voting members. After two years, the agreement permitted sale of the units and guaranteed compounding two percent interest on the amount paid for the units from the date of purchase to the date of sale. During the two years, petitioner would not receive any payments from the L.L.C.
That September, petitioner again applied for Medicaid, including a retroactive application for the month of August (the month the L.L.C. was created). The DHS found that petitioner was eligible for Medicaid, but applied a divestment penalty,
Petitioner then aрpealed to the circuit court, which reversed the hearing referee, holding that petitioner’s purchase of the L.L.C. shares was not a divestment because she received fair market value for her money. In reaching this conclusion, the court initially observed that federal law permits certain annuity purchases and asset transfers for a spouse’s benefit in order to circumvent countable asset provisions and qualify for Medicaid long-term-care benefits,
the purchase of stock in the family limited liability company in this case was not, by definition, a “divestment” because the transfer was not “for less than fair market value.” In fact, the value of the asset did not change — the asset merely took another form — a form that legally made it unavailable and uncountable. Based on the authority cited herein, not only is the value of the stock not countable, but the income stream from that investment is also not countable.
Accordingly, the court reversed the hearing referee’s decision and determined that petitioner was entitled to long-term-care benefits without a divestment penalty.
We granted the DHS’s application for leave to appeal, Marden v Dep’t of Human Servs, unpublished order of the Court of Appeals, entered March 18, 2009 (Docket No. 288966), and now reverse.
II. ANALYSIS
A. GENERAL MEDICAID BACKGROUND
In 1965, Congress enacted Title XIX of the Social Security Act, commonly known as the Medicaid act. See 42 USC 1396 et seq. This statute created a cooperative program in which the federal government reimburses state governments for a portion of the costs to provide medical assistance to low-income individuals. Cook v Dep’t of Social Servs,
Like many federal programs, since its inception the cost of providing Medicaid benefits has continued to skyrocket. The act, with all of its complicated rules and regulations, has also become a legal quagmire that has resulted in the use of several “loopholes” taken advantage of by wealthier individuals to obtain government-paid long-term care they otherwise could afford. The Florida District Court of Appeal accurately described this situation, and Congress’s attempt to curb such practices:
After the Medicaid program was enacted, a field of legal counseling arose involving asset protection for future disability. The practice of “Medicaid Estate Planning,” wherеby “individuals shelter or divest their assets to qualify for Medicaid without first depleting their life savings,” is a legal practice that involves utilization of the complex rules of Medicaid eligibility, arguably comparable to the way one uses the Internal Revenue Code to his or her advantage in preparing taxes. See generally Kristin A. Reich, Note, Long-Term Care Financing Crisis — Recent Federal and State Efforts to Deter Asset Transfers as a Means to Gain Medicaid Eligibility, 74 N.D. L.Rev. 383 (1998). Serious concern then arose over the widespread divestiture of assets by mostly wealthy individuals so that those persons could become eligible for Medicaid benefits. Id.; see also Rainey v. Guardianship of Mackey,773 So.2d 118 (Fla. 4th DCA 2000). As a result, Congress enacted several laws to discourage the transfer of assеts for Medicaid qualification purposes. See generally Laura Herpers Zeman, Estate Planning: Ethical Considerations of Using Medicaid to Plan for Long-Term Medical Care for the Elderly, 13 Quinnipiac Prob. L.J. 187 (1988). Recent attempts by Congress imposed periods of ineligibility for certain Medicaid benefits where the applicant divested himself or herself of assets for less than fair market value. 42 U.S.C. § 1396p(c)(1)(A); 42 U.S.C. § 1396p(c)(1)(B)(i); Fla. Admin. Code R. 65A-1.712(3). More specifically, if a transfer of assets for less than fair market value is found within 36 months of an individual’s application for Medicaid, the state must withhold payment for various long-term care services, i.e., payment for nursing home room and board, for a period of time referrеd to as the penalty period. Fla. Admin. Code R. 65A-1.712(3). Medicaid does not, however, prohibit eligibility altogether. It merely penalizes the asset transfer for a certain period of time. See generally Omar N. Ahmad, Medicaid Eligibility Rules for the Elderly Long-Term Care Applicant, 20 J. Legal Med. 251 (1999). [Thompson v Dep’t of Children & Families, 835 So 2d 357, 359-360 (Fla App, 2003).]
In Gillmore the Illinois Supreme Court recognized this same history, noting that over the years (and particularly in 1993), Congress enacted certain measures to prevent persons who were not actually “needy” from making themselves eligible for Medicaid:
In 1993, Congress sought to combat the rapidly increasing costs of Medicaid by enacting statutory provisions to ensure that persons who could pay for their own care did not receive assistance. Congress mandated that, in determining Medicaid eligibility, a state must “look-back” into a three- or five-yearperiod, depending on the asset, before a person applied for assistance to determine if the person made any transfers solely to become eligible for Medicaid. See 42 U.S.C. § 1396p(c)(1)(B) (2000). If the person disposed of assets for less than fair market value during the look-back period, the person is ineligible for medical assistance for a statutory penalty period based on the value of the assets transferred. See 42 U.S.C. § 1396p(c)(1)(A) (2000). [Gillmore, 218 Ill 2d at 306 (emphasis added).]
See, also, ES v Div of Med Assistance & Health Servs, 412 NJ Super 340, 344;
This statutory look-back period, noted in Gillmore and Thompson and contained within 42 USC 1396p(c)(1), requires a state to look back a number of years (in this case five) from the date of an asset transfer to determine if the applicant made the transfer solely to become eligible for Medicaid, which can be established if the transfer was made for less than fair market value. See Family Independence Agency, Program Eligibility Manual (PEM) 405 (April 1, 2004), pp 1, 4; see also Gillmore, 218 Ill 2d at 306. “Less than fair market value means the compensation received in return for a resource was worth less than the fair market value of the resource.” PEM 405, p 6.
A transfer for less than fair market value during the “look-back” period is referred to as a “divestment,” and unless falling under one of several exclusions, subjects the applicant to a penalty period during which payment of long-term-care benefits is suspended. See, generally, PEM 405, pp 1, 4-9. “Congress’s imposition of a penalty for the disposal of assets or income for less than fair market value during the look-back period is intended to maximize the resources for Medicaid for those truly in need.” ES, 412 NJ Super at 344.
Turning to the case before us, then, the issue presented is this: whether the 93-year-old petitioner’s investment of $111,460.47 in an L.L.C. formed by her daughter for the sole purpose of qualifying petitioner for Medicaid benefits constituted a divestment, and if so, is it otherwise excluded as a divestment.
B. WAS THIS A DIVESTMENT?
“This Court reviews a decision of an administrative agency in the same limited manner as does the circuit court.” Barker Bros Constr v Bureau of Safety & Regulation,
is limited to determining whether the decision was contrary to law, was supported by competent, material, and substantial evidence on the whole record, was arbitrary or capricious, was clearly an abuse of discretion, or was otherwiseaffected by a substantial and material error of law. “Substantial” means evidence that a reasoning mind would accept as sufficient to support a conclusion. [Dignan v Mich Pub Sch Employees Retirement Bd, 253 Mich App 571 , 576;659 NW2d 629 (2002) (citations omitted); see also MCL 24.306.]
The substantial evidence standard is indistinguishable from the clearly erroneous standard of review. Boyd v Civil Serv Comm,
At the outset we recognize that in creating the L.L.C., petitioner made no pretense that the corporation’s purpose was for any reason other than circumventing Medicaid rules that would otherwise render her ineligible for long-term-care benefits for a certain period. Such a purpose flies in the face of the general Congressional intent in creating the Medicaid program, i.e., to provide benefits to the truly needy, and of the 1993 amendments, i.e., to preclude asset transfers by those with wealth who would rather pass on their accumulated wealth and at the same time qualify for Medicaid without penalty. See ES, 412 NJ Super at 352; Estate of Gonwa v Wisconsin Dep’t of Health & Family Servs,
As one court has noted, however, Medicaid contains loopholes permitting transfers that are inconsistent with the goals of that legislation, Mertz v Houstoun,
To be eligible for Medicaid long-term-care benefits in Michigan, an individual must meet a number of criteria, including having $2,000 or less in countable assets. Department of Human Services, Bridges Eligibility Manual 400 (January 1, 2010), pp 4-5; Ronney v Dep’t of Social Servs,
With respect to fair market value, PEM 405, p 6, instructs that the phrase, “[l]ess than fair market value[,] means the compensation received in return for a resource was worth less than the fair market value of the resource” and elaborates that compensation must have “tangible form” and “instrinsic value.” Neither the Medicaid act nor the PEM offers a definition of “fair market value.” However, this Court has explained that the common understanding of “fair market value” is “the amount of money that a ready, willing, and able buyer would pay for the asset on the open market. . . .” Wolfe-Haddad Estate v Oakland Co,
Although no Michigan court has attempted to define the parameters of an arm’s-length transaction, several courts in our sister states have indicated “that an arm[’]s-length transaction is characterized by three elements: it is voluntary, i.e., without compulsion or duress; it generally takes place in an open market; and the parties act in their own self-interest.” Bison Twp v Perkins Co,
While no Michigan case specifically addresses the issue before us today, other courts’ treatments of asset transfers to circumvent countable asset requirements in similar contexts are instructive. For example, the Wisconsin Court of Appeals held that the purchase of a balloon annuity (an annuity where a substantial portion of the benefit is paid toward the end of the benefit term) from close relatives constituted a divestment because the transfer was for less than fair market value. Buettner v Wisconsin Dep’t of Health & Family Servs,
The Commonwealth Court of Pennsylvania decided two cases on the same day, Pyle v Dep’t of Pub Welfare,
In addressing these similar fact scenarios, the court utilized Pennsylvania’s definition of fair market value, which is the “ ‘price which property could be expected to sell for on the open market or would have been expected to sell on the open market in the geographic area in which the property is located.’ ” Ptashkin, 731 A2d at 245, quoting 55 Pa Code 178.2. Focusing on the “open market” part of the definition similar to what we have in Michigan, in both cases the court concluded that the transactions involving the loan of large sums of money in exchange for low monthly payments followed by balloon payments were not fair market value transactions. Critical to the court’s conclusion that both deals were “absurd” were the facts that the applicants were surrendering the principal without any security while receiving a monthly payment lower than what was required by the prescribed interest rates. Ptashkin,
Also analogous is the situation presented to the United States District Court in Wesner v Velez, unpublished opinion of the United States District Court for the District of New Jersey, issued April 19, 2010 (Docket No. 10-308). In that case, Wesner gave an $80,000 gift to her close friend and power of attorney, Aamland. That same month (December 2008) Wesner purchased a promissory note from Aamland for $60,000, with the payments going to Wesner to cover her nursing care for the 13 months before her request for Medicaid funds. The promissory note was not disclosed in her January 2009 application for benefits, but once the note was disclosed to the state, Wesner filed suit seeking to enjoin the state from treating the note as a prohibited trust-like device. In deciding Wesner’s motion for a preliminary injunction, the court noted
Wesner asserts that 42 U.S.C. § 1396p(c)(1)(I)(i)-(iii) was enacted by Congress to avoid “sham transactions.” The transaction entered into by Wesner and Aamland appears to be a “sham transaction” designed to avoid application of the rules governing Medicaid eligibility. The loan between Wesner and Aamland has all the characteristics of a trust-like device under the POMS.[9] This was not an arm[’]s-length transaction between two unrelated parties. Aamland and Wesner apparently enjoy a close friendship; Wesner gave Aamland an $80,000.00 uncompensated gift and has made Aamland her [power of attorney]. As such, Aamland owes Wesner a fiduciary duty. Further, Wesner admits that the gift/loan transaction entered into with Aamland was part of a “Medicaid planning technique.” Based a [sic] review of the evidence before the Court at this time, the Court concludes that Wesner has failed tо establish that she is likely to succeed on the merits of her claim; therefore, Wesner’s motion for a preliminary injunction is denied. [Wesner, unpub op at 10-11 (citation omitted).]
Turning to the case before us, we recognize that the potential return on the sale of petitioner’s interest would exceed the amount of her original investment after two years.
While the DHS contests the transfer on the grounds that the two-year waiting period, alone, rendered the transaсtion for less than fair market value, we are hard pressed to reach that conclusion where the investment would increase in value over the two-year restriction period. However, that petitioner would not realize this value for two years is a relevant factor to consider, it is just not alone dispositive of this issue. In so concluding, and for the reasons detailed below, we agree with the DHS that the circuit court erred in reversing the hearing referee, as under these unique facts the purchase of the L.L.C. shares was for less than fair market value.
Utilizing the foregoing dictionary definitions and caselaw, we hold that petitioner’s purchase of shares in an L.L.C. (1) that is unsecured, (2) operated exclusively by her daughter (and her attorney-in-fact), (3) that is not an approved investment vehicle under PEM 405, (4) whose shares are unavailable in the open market and are nonassignable, (5) where there is no evidence of actuarial soundness, (6) where no monthly distributions are made to petitioner during the two-year period, and (7) was
Indeed, these circumstances reveal that this transaction was an impermissibly abusive attempt to shelter assets. Gillmore, 218 Ill 2d at 324-325; see also Thompson, 835 So 2d at 359-360. The evidence reveals an unsecured private transaction between relatives, one of whom was the other’s fiduciary, wherein a purchase of shares was made without any ability to sell or otherwise exchange the shares for a two-year period. The L.L.C. was operated exclusively by an individual who was both a close relative and fiduciary, and the L.L.C. had no real business other than to return petitioner’s investment, plus two percent compounded interest, at the end of two years.
In sum, taken together these facts point to the inescapable conclusion that this was not an asset that was purchased on the open market, but instead was an arrangement between relatives, not strangers in an arm’s-length transaction. Thus, the compensation petitioner was ultimately to receive “was worth less than the fair market value of the resource” because nothing about this transaction revealed a fair market value, i.e., it was not made through an arm’s length transaction on the open market. Accordingly, the DHS properly concluded that this particular transaction was for less than fair market value, and was subject to the divestment penalty.
In making her arguments, petitioner fails to recognize, or at least appreciate, the private, non-arm’s-length relationship involved in the trаnsaction. The definitions and caselaw recited clearly indicate that shell transactions between relatives that have little or no economic benefit to the applicant, are not for fair market value. This point was made by the court in Mertz, a case relied upon by the trial court. There, the applicant’s spouse had purchased two commercial annuities with $106,000 of joint assets, receiving in return just under $2,000 a month, or a 21/2 percent
Nor was the asset transfer in this case otherwise excluded as a divestment under the PEM. See PEM 405, pp 6-9. While PEM 405 certainly provides numerous categories of transfers that are excluded from consideration as a divestment, PEM 405 provides no exclusion category for an asset transfer for an interest in a closely held limited liability corporation, аs is the case here. Consequently, the trial court’s ruling that the investment was essentially a conversion of the asset into a form rendering the asset unavailable and uncountable was incorrect.
III. CONCLUSION
Petitioner invested a sizeable sum in the Marden Family L.L.C., which was created solely for the purpose of circumventing Medicaid eligibility requirements and which ceded total control to petitioner’s daughter (and fiduciary) for a fraction of the cost of petitioner’s investment. Under the terms of the agreement, petitioner would only receive a marginal return on her unsecured investment аfter two years. A willing buyer could not acquire such an asset on the open market in an arm’s-length transaction. Therefore, the transaction was for less than fair market value and constituted a divestment of assets not subject to an exclusion. The hearing referee’s conclusion affirming the imposition of a divestment penalty by the DHS was appropriate, albeit for the wrong reason. Thorin v Bloomfield Hills Sch Dist,
Reversed.
No costs, a public question being involved.
Notes
Elizabeth Marden died April 23, 2009, and Betsy Mackey was substituted as the personal rеpresentative of Marden’s estate. For clarity, Marden will be referred to as petitioner throughout this opinion.
A divestment penalty is computed by dividing the uncompensated value of the resource divested ($111,432.47) by the average monthly long-term-care costs in Michigan for the applicant’s baseline date ($5,938 in 2007). Family Independence Agency, Program Eligibility Manual (PEM) 405 (April 1, 2004), pp 8-9. The penalty would preclude petitioner from receiving benefits for just over 18 months. Nóte that the DHS, which produces the eligibility manual, was previously named the Family Independence Agency. The DHS recently renamed the Program Eligibility Manual the Bridges Eligibility Manual.
“Converting an asset from one form to another of equal value is not divestment even if the new asset is exempt. Most purchases are conversions.” Id. at 7.
The court cited § 6012(a) of the Deficit Reduction Act of 2005, PL 109-171, 120 Stat 4; 42 USC 1396p(c)(2)(B)(i); 42 USC 1396p(d)(2)(A)(ii); Mertz v Houstoun,
See In re Gault, unpublished opinion of the Grand Traverse Circuit Court, issued March 16, 2007 (File No. 06-25485-AA), and In re Olsen, unpublished opinion of the Manistee Circuit Court, issued June 6, 2007 (File No. 06-12519-AA). The DHS appealed neither case to this Court.
In Michigan, the Department of Community Health oversees the Medicaid program, which the DHS administers pursuant to the Social Welfare Act, MCL 400.1 et seq.
Both the executive and legislative branches have supported elimination of any loopholes that allow individuals with resources to transfer assets as a way of qualifying for Medicaid benefits. For example, when signing into law the Deficit Reduction Act of 2005, PL 109-171, 120 Stat 4, President George W Bush stated that the act “ ‘tightens the loopholes that allowed people to game the system by transferring assets to their children so they can qualify for Medicaid benefits.’ ” See Reif, A Penny Saved Can Be A Penalty Earned: Nursing Homes, Medicaid Planning, The Deficit Reduction Act of 2005, And The Problem of Transferring Assets, 34 NYU Rev L & Soc Change 339, 347 (2010) (citation omitted).
At oral argument before the trial court petitioner admitted that the intent in creating the L.L.C. was to qualify her for Medicaid long-term-care benefits, but that her intent was not relevant.
9 “The Social Security Administration has published a Program Operating Mаnual System (POMS) representing the publicly available operating instructions for processing Social Security claims. While not the product of formal rulemaking, the POMS provide guidance to the courts and warrant respect.” Wesner, unpub op at 6 (quotation marks and citations omitted).
Petitioner calculated the return on the sale of her investment to be $113,922.98, or a profit of $2,490.51.
Specifically, petitioner points to 17 CFR 230.144(d) and IRS Revenue Ruling 59-60, § 8.
Petitioner’s reliance on the ruling of the United States Court of Appeals for the Third Circuit in James is unavailing as the central issue in that case was “whether a non-revocable, non-transferable annuity may be treated as an available resource by the [Pennsylvania Departmеnt of Public Welfare] for the purposes of calculating Medicaid eligibility.” James,
Interestingly, the records for the Marden Family L.L.C. bank account reveal that a four percent interest rate was applied to deposited monies, highlighting the fact that the two percent rate awarded by the L.L.C. was lower than what was available on the open market.
This is not to say, however, that investment in an L.L.C. or even a closely held corporation would be a per se divestment, but only thаt the scheme at issue in this case constitutes a transfer for less than fair market value.
Whether petitioner’s investment was unavailable and uncountable on account of the transfer does not impact whether the transfer is a divestment, but rather goes to the initial determination of whether an applicant is eligible for Medicaid benefits. ES, 412 NJ Super at 348 (stating that “[i]f any of the applicant’s resources are transferred for less than fair market value during the look-back period, they are included in the eligibility analysis as funds available to the applicant,” and result in delayed eligibility and imposition of a transfer penalty); see also 42 USC 1396p(c)(1)(A).