In its long-awaited decision in the Daley and Nadeau cases released on May 30th, 2017 ( Daley v. Secretary of the Executive Office of Health and Human Services (Mass., No. SJC-12200, May 30, 2017) and Nadeau v. Director of the Office of Medicaid (Mass., No. SJC-12205, May 30, 2017)), the Supreme Judicial Court rules that MassHealth cannot count assets owned by irrevocable trusts as available to an applicant for MassHealth unless and only to the extent the trustee may distribute principal to the applicant or his or her spouse. MassHealth had argued that the right of the applicant or his or her spouse to use and occupy a residence owned by a trust makes it available and countable.
The SJC Opinion
The SJC begins its decision by providing a cogent description of the role of Medicaid (MassHealth in Massachusetts) in funding long-term care costs in the United States and the Medicaid eligibility rules. It then describes the basic rule about counting assets in irrevocable trusts, which it refers to as the "any circumstances test":
if the trustee is afforded even a "peppercorn of discretion" to make payment of principal to the applicant, or if the trust allows such payment based on certain conditions, then the entire amount that the applicant could receive under "any state of affairs" is the amount counted for Medicaid eligibility.
MassHealth argues that its position that "a right to use and occupancy can be a form of 'payment' to a Medicaid applicant" is supported by a 1994 transmittal from the Health Care Financing Administration (HCFA), which preceded the current Centers for Medicare & Medicaid (CMS), in being responsible for the national administration of the Medicaid program. The SJC disagrees:
We conclude that HCFA Transmittal 64 accurately interprets the meaning of "payment from the trust" in 42 U.S.C. Sec. 1396p(d)(3). We also conclude that MassHealth has misinterpreted the meaning of these words in both the statute and the transmittal.
The SJC then discusses the nature of a home in a trust, finding that if the applicant for benefits has the right to use and occupy real estate owned by the trust, this means she has the right to any rental income received by the trust.
This payment, however, is not a payment from the corpus of the trust; the grantors do not have the power through their right of use and occupancy to sell the property under any circumstances. It is instead a payment from the "income on the corpus." Such payments, whether actually received as rental income or imputed as the fair market rental value of the grantors' occupancy of the home, may be countable as income of the grantors, but the value of the home is not thereby countable as their asset.
The SJC comments further:
By declaring the equity in a home owned by an irrevocable trust to be actually available to an applicant where the trustee has no power to sell the home and distribute the proceeds to the applicant under any circumstance, Massachusetts is effectively "conjuring [a] fictional" resource (the applicant's home) by "imputing financial support" from a person who has no authority to furnish it (the trustee).
But the Cases Continue
While the issue as to whether the right to use and occupancy makes a home countable is decided in this case, both Nadeau and Daley contain other issues that the SJC chooses not to decide. The Nadeau trust permits the grantor to appoint property to a charitable organization. The SJC raises the question as to whether this could be construed to make the principal available to Mr. Nadeau under the "any circumstances' trust, since many nursing homes are operated by nonprofits. It remands the case back to MassHealth to consider this question.
The trusts in both cases permit the trustee to pay any tax liability the grantor may incur due to income earned by the trust. This may be a distribution from principal which may make some of the principal available to the applicant for MassHealth:
Because the Daley Trust, like the Nadeau Trust, is intended to be construed as a "grantors trust" and the trustee may pay any tax liability arising from the corpus of the trust, we remand to MassHealth to determine whether this portion of the corpus is a countable asset under the 'any circumstances" test and to ascertain the size of the "portion of the corpus from which . . . payment to the individual could be made" in this circumstance.
What This Means
This is the latest in a string of court decisions that have rejected unsupportable MassHealth legal arguments that have plagued Massachusetts seniors who had relied on MassHealth's prior interpretation of its own laws and regulations. The courts have previously rejected MassHealth's arguments that:
- if the trust can purchase an annuity it can transform trust principal to income and distribute all the income to the beneficiary;
- if the trustee has the administrative authority to determine what trust property is income and what is principal, it can simply call principal income and distribute it all; and
- the right to substitute other property for trust property of equal value makes the trust property available and countable.
Unfortunately, the Daley-Nadeau decision still leaves significant uncertainty, which MassHealth may exploit to continue to challenge MassHealth planning trusts. With respect to the common trust provision that the trustee can pay taxes attributable to trust income, the SJC provides little guidance to the standard MassHealth must use on remand. We are waiting to see how it will respond, whether it decides to throw in the towel with respect to its creative legal arguments, which have cost untold stress and legal costs to Massachusetts seniors and their families, or will continue swiping at windmills.
Two More Points
First, be aware that these cases only apply to trusts created and funded by applicants for MassHealth or their spouses. These rules do not apply to trusts created and funded by other people.
Second, I am proud that the SJC cites two publications by my partner, Jeffrey A. Bloom, as authorities in the opinion. These are a chapter on "Nursing Home MassHealth Eligibility," that Attorney Bloom wrote with Attorney Steven M. Cohen in Massachusetts' Continuing Legal Education's publication, Estate Planning for the Aging or Incapacitated Client in Massachusetts and the book on Elder Law published by Thomson Reuters as part of its Massachusetts Practice Series.