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Bar News - March 22, 2017

Elder, Estate Planning & Probate Law: Medicaid Irrevocable Trusts: A Tale of Two Cities?


With the increasing cost of nursing home care, some elders are using Medicaid irrevocable trusts to try to protect their assets (typically, their residences) in case they have to be admitted to a nursing home and apply to receive Medicaid to cover the respective cost. The question is, do such trusts work? Last year, both the New Hampshire Supreme Court in In re Petition of Braiterman and a Massachusetts appellate court in Heyn vs. Director of the Office of Medicaid answered the question.

Both Braiterman and Heyn turned on each court’s interpretation of the “any circumstance” test. Under 42 USC Section 1396p(d)(3)(B), if there are any circumstances under which payment from the trust could be made to or for the benefit of the Medicaid applicant, then the Medicaid irrevocable trust is deemed countable for the purpose of determining the Medicaid applicant’s eligibility for Medicaid. In Braiterman, the New Hampshire court appears to have interpreted the “any circumstance” test broadly and, consequently, found the Medicaid irrevocable trust at issue problematic. In contrast, in Heyn, the Massachusetts court appears to have interpreted the “any circumstance” test narrowly and, consequently, found the Medicaid irrevocable trust at issue not problematic.

In re Petition of Braiterman

In Braiterman, with respect to the question of whether or not such trusts work, the court stated, “we have no doubt that self-settled, irrevocable trusts may, if so structured, so insulate trust assets that those assets will be deemed unavailable to the settlor” (citing Doherty).

The NH Department of Health and Human Services (DHHS) denied the applicant’s Medicaid application on the ground that her assets, which included her Medicaid irrevocable trust, exceeded the limit set for Medicaid-Old Age Assistance (Medicaid-OAA). The Administrative Appeals Unit (AAU) of DHHS upheld that determination.

The court applied the “any circumstance” test to the trust and found persuasive the State Medicaid Manual, which states that a “payment” from a trust may include cash, as well as noncash property disbursements, such as the right to use and occupy real property. Payments made “for the benefit” of the Medicaid applicant can including payments to another person or entity such that the Medicaid applicant derives some benefit from the payment, and payments to maintain a home.

Based on the trust’s provisions and the facts of the case, the court held that the AAU lawfully and reasonably concluded that there were circumstances under which payment from the trust could be made to benefit the Medicaid applicant. Specifically, based on some of the trust provisions, the court found the Medicaid applicant, as settlor of the trust, retained at least some powers over the trust property, including the powers to appoint any part or all of the undistributed income of the trust fund to any one or more of the legatees (the settlor’s children). The court noted there was nothing in the trust agreement to preclude the Medicaid applicant from requiring her children, as a condition of their receipt of the trust principal, to use those funds for her benefit. The fact that the Medicaid applicant was not a trust beneficiary was not dispositive, the court found.

Heyn vs. Director of the Office of Medicaid

In Heyn, the Massachusetts appellate court ruled on the use of a Medicaid irrevocable trust and its respective provisions, stating, “[i]t is settled that, properly structured, such trusts may be used to place assets beyond the settlor’s reach and without adverse effect on the settlor’s Medicaid eligibility.”

The hearing officer concluded the trust authorized distributions of principal to the settlor and suggested that the trustee could sell trust property, invest the proceeds in an annuity, and then treat the resulting annuity payments as income eligible for distribution. The court disagreed, stating that an annuity consists of principal and income. The income is the same as other income earned by any trust asset. The trustee’s power to determine what should be allocated to principal and income does not matter in this context. The trustee’s authority in that respect is expressly constrained by reasonable accounting principles and practice and state law, which allocates money received by a trust to principal unless it is characterized otherwise.

The hearing officer also concluded the trust principal could be made available for distribution to the settlor by directing conveyance of trust property to a child who, in turn, could convey it to the settlor. The court disagreed and found that no case supported such a conclusion. A provision making trust principal available to a person other than a settlor does not, by its nature, make it available to the settlor, any more than if the settlor had gifted the same property to such person when the settlor created the trust, rather than transferring it to the trust.

The hearing officer further concluded the trust principal could be made available for distribution to the settlor, through the settlor’s power to require the trustee to substitute assets of equivalent value. According to the hearing officer, the settlor could compel the trustee to return the settlor’s former residence that the settlor previously transferred to the trust back to the settlor, in exchange for assets of equal value. The court disagreed, ruling that such an exchange would be equivalent to a sale of trust assets.

In Braiterman, the court distinguished Heyn, not finding it persuasive. The court noted that, unlike the trust in Braiterman, the trust in Heyn expressly precluded the trustee from distributing part or all of the principal to the Medicaid applicant. The trust in Heyn did not authorize the applicant to impose any conditions on the appointment of principal to the Medicaid applicant’s issue.

Practical Effect

Elders may have more flexibility in the provisions permissible in a Massachusetts Medicaid irrevocable trust, as compared with a New Hampshire Medicaid irrevocable trust.

Even though both the New Hampshire court in Braiterman and the Massachusetts court in Heyn stated Medicaid irrevocable trusts work if properly drafted, because of the New Hampshire court’s broader interpretation of the “any circumstance” test, circumstances in Massachusetts could be more beneficial to elders.

Such trusts likely will continue to be challenged in both New Hampshire and Massachusetts, and clients should be aware there is no guarantee such a trust will work in either state.

David Beliveau

David M. Beliveau is the founder of Beliveau Law Group, with offices in Florida, Massachusetts, and New Hampshire. He focuses his practice on elder law, estate planning, probate, small business and tax.

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