In case you missed the memo, Medicaid doesn’t like trusts. The rules relating to trusts you create with your money or property are found at 42 U.S.C. § 1396p(d). To put this discussion in context, we’ll begin with the sections relevant to the “any circumstances” test, but the full text of subsection (d), as of the date of this post, is below.
First, the any circumstance test only applies to irrevocable trusts. It only applies to trusts established by the applicant (and others named in subsection (d)(2)A), or that were funded with money or property belonging to the applicant or the other named persons. These rules do not apply to revocable trusts because they have no protection under the Medicaid rules. Revocable trusts are always countable when determining Medicaid eligibility. The rules do not apply to trusts established by Will, although as the Hegadorn decision, below, indicates, how the trust was funded may still be considered. Nuggets gleaned from the cases below are summarized here.
The relevant subsection is (d)(3)(B), which provides:
(B) In the case of an irrevocable trust—
(i) if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources available to the individual, and payments from that portion of the corpus or income—
(I) to or for the benefit of the individual, shall be considered income of the individual, and
(II) for any other purpose, shall be considered a transfer of assets by the individual subject to subsection (c); and
(ii) any portion of the trust from which, or any income on the corpus from which, no payment could under any circumstances be made to the individual shall be considered, as of the date of establishment of the trust (or, if later, the date on which payment to the individual was foreclosed) to be assets disposed by the individual for purposes of subsection (c), and the value of the trust shall be determined for purposes of such subsection by including the amount of any payments made from such portion of the trust after such date.
This section creates a yes/no dichotomy (all or nothing) when determining whether an irrevocable trust is countable when determining Medicaid eligibility. If there are any circumstances under which principal and/or income could be made available to or used for the benefit of the applicant, no matter how hypothetical or unlikely, then the trust remains available and is countable. If there are no circumstance under which the trust principal and/or income are available to the applicant or to be used for his or her benefit, then the transfer of resources rules apply; if more than sixty months have passed since funding, then the portion of the trust not available to the applicant under any circumstances is protected.
A “payment” from a trust “is any disbursal from the corpus of the trust or from income generated by the trust which benefits the party receiving it.” State Medicaid Manual, Pub. No. 45, supra ch. 3, § 3259.1(A)(8) (Rev.64). A “payment” from a trust “may include actual cash, as well as noncash or property disbursements, such as the right to use and occupy real property.” Manual, supra ch. 3, § 3259.1(A)(8) (Rev.64).
Section 3259.6 of the State Medicaid Manual defines payments made “for the benefit” of the individual applying for Medicaid benefits as
payments of any sort, including an amount from the corpus or income produced by the corpus, paid to another person or entity such that the individual derives some benefit from the payment. For example, such payments could include purchase of clothing or other items, such as a radio or television, for the individual. Also, such payments could include payment for services the individual may require, or care, whether medical or personal, that the individual may need. Payments to maintain a home are also payments for the benefit of the individual.
Manual, supra ch. 3, § 3259.6(D) (Rev.64) (emphases added).
The Manual advises that “[i]n determining whether payments can or cannot be made from a trust to or for an individual,” one should “take into account any restrictions on payments, such as use restrictions, exculpatory clauses, or limits on trustee discretion that may be included in the trust.” Manual, supra ch. 3, § 3259.6(E) (Rev.64).
In a 2008 Georgia case decided by an administrative law judge, an irrevocable trust failed the any circumstances test and was countable. Although the trust language stated that if the settlor was admitted to a facility that accepted Medicaid, the settlor’s right to principal and income would lapse, the ALJ found that the settlor could have a chosen a facility that did not accept Medicaid and, for that reason, the trust failed the any circumstances test.
In Hegadorn v. Livingston County Dep’t of Health and Human Services (Mich. App. 2023), the court framed the issues as “whether there were any circumstances under which the proceeds of the “Ralph D. Hegadorn Irrevocable Trust No. 1 (Sole Benefit Trust)” (“Hegadorn SBO Trust”) could be paid to Mrs. Hegadorn or for her benefit.”
Mrs. Hegadorn was admitted to a nursing home in 2013. Her husband established the Hegadorn Sole Benefit Trust as part of eligibility planning. Mr. Hegadorn was a beneficiary and neither he nor his wife were beneficiaries. The trust was structured to make actuarially sound distributions to Mr. Hegadorn during his lifetime to exhaust income and principal. The trust remainder, if any, was to be distributed following Mr. Hegadorn’s death “to the trustee of the Special Supplemental Care Trust for Mary Ann Hegadorn [“Supplemental Care Tust”], created by my Will dated the same day as this Agreement, as my Will may be amended from time to time.”
Initially, Mrs. Hegadorn was denied eligibility because Medicaid found that assets in the Hegadorn SBO Trust were countable and exceeded the CSRA. Mr. Hegadorn appealed, with the case going to the Michigan Supreme Court. The Court held that principal in a trust formed solely for the benefit of a community spouse “is not per se a `resource available’ to an institutionalized spouse under 42 USC 1396r-5(c)(2) for the purpose of determining an institutionalized spouse’s eligibility for Medicaid benefits.” “[T]he principal of an irrevocable trust may become a resource available to an institutionalized spouse, and thus a countable asset, if the following conditions are met: (1) assets of the institutionalized spouse are used to form the principal of the trust, 42 USC 1396p(d)(2)(A); (2) the institutionalized spouse, his or her spouse, or one of the other entities listed under 42 USC 1396p(d)(2)(A)(i) through (iv) established the trust using a means other than a will; and (3) there are “any circumstances under which payment from the trust could be made to or for the benefit of” the institutionalized spouse.”
The Michigan Supreme Court found that the first two prongs of its three part test were satisfied, but declined to determine whether there were any circumstances under which Mrs. Hegadorn could benefit from the SBO trust. Thus, the case was remanded. On remand, the ALJ again found the trust available and, therefore, countable. The ALJ reasons “because Mr. Hegadorn would receive payments from the trust, and spouses are responsible for each other, a payment to Mr. Hegadorn satisfied the any-circumstances rule.” On appeal, the Circuit Court reversed the ALJ, holding that payments were only made to the Community Spouse during his lifetime and, at his death, to a testamentary trust; in other words, there were no circumstances under which payments from the trust could be made to Mrs. Hegadorn, the institutionalized spouse.
When the case returned to the Michigan Court of Appeals, the court upheld the Circuit Court, finding that the ALJ erred by treating Mr. and Mrs. Hegadorn as alter egos. The Court of Appeals found that Michigan’s Supreme Court expressly rejected this notion. “In Hegadorn II, our Supreme Court explicitly rejected this reasoning. It specifically held that a trust’s payments to “a community spouse does not automatically render the assets held by the trust countable for the purpose of an institutionalized spouse’s initial eligibility determination.” Hegadorn II, 503 Mich at 239. In reaching this conclusion, the Court in Hegadorn II rejected federal caselaw that rested on the presumption that trust proceeds benefiting one spouse automatically benefit the other. See Hegadorn II, 503 Mich at 268 & n 26 (rejecting the holding in Johnson v Guhl, 357 F3d 403, 409 (CA 3, 2004)).”
Although the Circuit Court was correct in its initial holding, it incorrectly applied the any circumstances test by presuming payment to the Supplemental Care Trust was exempt from the rule. “Application of the any-circumstances rule requires a court or administrator to “consider not only obvious circumstances, but also those that are hypothetical or even unlikely.” Depending on the terms of the Supplemental Care Trust, it “very well may satisfy the any-circumstances test.” Although the Supplemental Care Trust was created by Will, it was funded with assets belonging to Mr. and Mrs. Hegadorn. For that reason, the the agency and the court had to apply the any-circumstances test. Unfortunately, the test could not be applied because the Supplemental Care Trust was not in the record. For that reason, the Court of Appeals remanded the case “to the ALJ a third time, with an even more limited mandate: to review the terms of the Supplemental Care Trust, determine whether under its terms its assets would have been countable in determining Mary Ann Hegadorn’s Medicaid eligibility, and to apply the any-circumstances test and calculations described in Hegadorn II.”
Henderson v. Dept Of Health And Human Services (Mich. Ct. Ap. 2023) applies the second prong of subsection (d)(3)(B). The trust in this case could not pay out any assets to the settlor, so it was subject to the transfer penalty rules. Since the trust was established and funded within the look-back period, a transfer of resource penalty was calculated and imposed. the settlor/applicant argued that Hegadorn essentially abolished the diverstment penalty, but that position was rejected; Hegadorn did not address the divestment penalty because that issue was not raised. A similar result was reached concerning a burial trust in Barral v. Ariz. Health Care Cost Containment Sys. Admin., 2012 Ariz. App. Unpub. LEXIS 329.
In Harves v. Rusyniak, 219 NE3d 166 (Ind. Ct. App. 2023), settlor’s children established an irrevocable trust, funding it with the settlor’s assets. She applied for Medicaid four months after the trust was established and eligibility was denied. On appeal, she argued that 1396p(c)(2)(C) applied because she intended to receive fair market value for the transfer; her children showed that they provided more than $900,000 in care for settlor before the nursing home admission. Settlor argued that her assets were placed in the Trust to compensate her children for the services they provided her over the years, as envisioned by the Personal Service Contract, and that therefore she disposed of the assets “for other valuable consideration.”
The court found that a determination under (c)(2)(C) is not made unless the applicant would be otherwise eligible. Thus, the court must first determine whether the trust assets were available. The court found that the ALJ and the trial court erred by failing to consider the third element necessary to determine whether the trust assets were available, namely, that “must be circumstances under which payment from the trust could be made to or for the benefit of the individual.” The courts below failed to reach this issue so the case was remanded for a determination on the third element, namely, whether the trust assets were available.
In Fujimori v. Dep’t of Human Serv., 517 P.3d 785) (Haw. Intermediate Ct. App. 2022), settlors transferred their property to a trust, reserving “a life estate in an undivided ten-thousandth (.0001 or 1/10,000) interest in and to the Property.” This transfer occurred more than 60 months prior to a Medicaid application, but the property was sold less than 60 months prior to the application and, when it was sold, all of the money was paid to the trust. The applicants transferred their life estates to the purchaser without consideration, arguing that it was a diminimus transfer. Doing the math, applicant’s argued that “[e]ven when using the $700,000 fair market value as a starting point, [Florence] could only have received, at most, $10.33, and [Edward] could only have received, at most, $9.02.” However, because the applicants were the sole owners of the life estate, the court found “no evidence in the record that Florence and Edward’s right to enjoy the entire Property as life tenants was somehow diminished or restricted by holding a life estate in only a 0.0001% interest to the Property.” For that reason, the court upheld the determination below that relinquishment of the life estate converted a property right into cash that was transferred to the trust.
In Sanders v. Saul, 2022 U.S. Dist. LEXIS 205336, the magistrate found that settlor’s trust was not a properly structured special needs trust, so any circumstances test applied. It failed that test by giving the trustee discretion to distribute trust principal to or for the benefit of settlor. For that reason, termination of SSI benefits was affirmed. Accepted by district court.
In Estate of Scheidecker v. Dep’t of Pub. Health, 490 P.3d 87 (Mont. 2021), Marilyn Scheider purchased a house in 2006. In 2008, she sold one-half of the home to her sister, Glenda and they established the Scheidecker-Martin Irrevocable Trust (“SM Trust”). Each transferred her one-half interest in the home to the trust. The house was the only trust asset and each continued residing there until Marilyn was admitted to a nursing home in 2016.
Marilyn applied for Medicaid and was denied. She requested a fair hearing. The ALJ concluded that the trust was revocable and, thefore, countable. The Board of Public Assistance affirmed that ruling on appeal. On appeal the District Court found that the ALJ erred when it found the trust was revocable. “Marilyn, as the settlor, had no authority or power to amend or revoke the trust. The District Court observed that pursuant to the terms of the trust, Marilyn waived all right and power to consent to its modification.” Nonethless, the District Court affirmed the decision below because “despite the SM Trust’s specific language precluding the trustee from using the principal for Marilyn’s benefit, should the trust be terminated “the beneficiaries could thereafter, individually, jointly, directly, or indirectly, give Marilyn this trust property for her benefit.”
The issue of revocability was not appealed, so the only issue on appeal was whether the trust violated the any circumstances test. Marilyn conceded that income, if any, was available, but “SM Trust’s principal is not available or countable because under the terms of the trust there are no circumstances through which Marilyn could access its principal.”
“The Department agrees that the “any circumstances” test applies here but differs in its interpretation of the test and the terms of the SM Trust. It argues that the District Court upheld the Administrative Law Judge’s conclusion that Marilyn retains numerous “incidents of ownership” over the trust’s corpus and that the “any circumstances” test includes imaginary or improbable circumstances, which the Estate ignores. The Department contends the “SM Trust assets are countable resources because they are available for [Marilyn’s] use and benefit during her lifetime and distribution upon her death in nearly every way that is material to ownership.” It contends that nothing in the SM Trust precludes mortgaging the principal to pay for a debt owned by Marilyn, therefore making the principal “available for her benefit.” The Department adds that Marilyn retains the right to reside in the home and is the owner of the trust property for tax purposes, and that if trust assets are sold, the sale proceeds would be held in a separate trust and administered for Marilyn’s benefit.”
The court noted that the statute distinguished income from principal. “The “any circumstances” provision in 42 U.S.C. § 1396p(d)(3)(B) contains another caveat: payments to the individual from the trust’s corpus and from the trust’s income are each treated separately, … if payments could be made from only the trust’s income, then only the income of the trust is counted as available to the Medicaid applicant; if payments could be made from only the corpus, only the corpus is considered available. See Hegadorn, 931 N.W.2d at 584-85; Daley v. Sec’y of the Exec. Office of Health & Human Servs., 477 Mass. 188, 74 N.E.3d 1269, 1275 (2017).”
In this case, the trust instrument included specific language precluding the trustee from using the trust corpus for Marilyn or for her benefit. The trust provides: “The Trustee has no power to invade principal for the Settlor’s benefit and shall not do so under any circumstance[s].”
The Court rejected Medicaid’s argument that beneficiaries could terminate the trust and make direct or indirect distributions to Marilyn. “[A] settlor’s eligibility for Medicaid coverage is determined by looking at the terms of the trust, not by what the trustee or beneficiaries hypothetically could agree to do despite the terms of the trust. … Even including those circumstances that are highly unlikely or hypothetical, this Court does not construe the “any circumstances” provision in 42 U.S.C. § 1396p(d)(3)(B) to encompass a court’s or agency’s misinterpretation of a written instrument’s terms or purposes.” It is worth noting, however, that in Doherty v. Dir. of Office of Medicaid, 908 NE2d 390 (Mass. Ct. App. 2009), the Court was concerned about beneficiaries invading trust assets for an applicant’s benefit.
The court likewise rejected Medicaid’s argument that the trust could borrow money and use those funds for Marilyn’s benefit. The trust expressly provided that corpus could not be used for Marilyn’s benefit.
With regard to the right to reside in the trust, “The Department also argues that Marilyn’s right to reside in the home, and responsibility to make repairs, insure, pay taxes on the home, pay for utilities, and various other “incidents of ownership” demonstrates that the SM Trust’s corpus is available for her benefit.” However, the court found that a right to live there did not give Marilyn access to trust corpus. Marilyn was entitled to the trust’s income and “[b]ecause the SM Trust permits Marilyn and her sister the right to reside in the residence, by choosing to do so they forego the ability to generate income through renting the house to others.” See Daley, 74 N.E.3d at 1280. Marilyn’s discretion begins and ends with their decisions to reside there or not.
The Medicaid agency had two final arguments, each of which was rejected. First, it argued that the home could be sold and, if so, the proceeds would be set aside for Marilyn and Glenda. However, Marilyn would only have access to income, not the corpus. Second, Medicaid argued that when Marilyn signed its Conditional Case Processing and Assistance Agreement, agreeing the trust would be treated as inaccessible while she tried to secure agreement from other beneficiaries to terminate the trust, doing so made the trust available under the any circumstances test. However, that agreement went beyond the four corners of the trust agreement and the “any circumstances” test is limited to the terms of the trust itself. See Guilfoil, 162 N.E.3d at 636 (court limiting its review to the “four corners of the trust” and not considering whether beneficiaries “by reason of love but without legal obligation” might make payments towards a grantor’s support in the event of a termination) (quoting Heyn v. Dir. of the Office of Medicaid, 89 Mass.App.Ct. 312, 48 N.E.3d 480, 486 (2016)); see also Spetz, 190 Misc. 2d at 299, 737 N.Y.S.2d at 526.
The court concluded by reversing the decision below after finding there are no circumstances under which payment from the SM Trust’s corpus could be made for Marilyn’s benefit.
In Guilfoil v. Sec. of Exec. Office of Health and Human Services, 486 Mass. 788 (Mass. 2021), the applicant established a trust eleven years prior to applying for Medicaid. She transferred her home to the trust, retaining a life estate. Under the trust, her five children held a remainder interest as joint tenants with rights of survivorship. The trust could be amended or terminated by the remainder beneficiaries, but not by the applicant. Upon the transfer of the plaintiff’s property to the trust, an immediate property interest vested in the beneficiaries. See Bromley v. Mitchell, 155 Mass. 509, 512 (1892). The plaintiff retained no rights of ownership. As the plaintiff contends, her initial transfer of the remainder interest in the property to her children is the equivalent of an irrevocable gift. Under MassHealth regulations, such a transfer is a non-countable resource in an applicant’s benefit eligibility determination after the lapse of a five-year disqualification period.
Retention of the life estate did not cause the interest to be countable or available. “Because a life estate does not permit an individual to sell the home and distribute the proceeds, we conclude that the retention by an applicant of a life estate in his or her primary residence does not render the property a countable asset.”
In Fournier v. Sec. Exec. Office of Health and Human Services, 488 Mass. 43 (Mass. 2021), a limited power of appointment in favor of nonprofit or charitable entities did not cause the trust to be countable. Picking up from Daley, the court found that state law prevented the applicant from using the limited power of appointment to benefit herself despite the absence of an express prohibition in the trust preventing her from doing so. “Taken together, the terms of the Misiaszek trust only permit Misiaszek to live in the home during her lifetime, to receive payments of trust income, and to make charitable contributions to organizations in which she has no interest. She is not permitted to receive any distribution of trust principal from the trustee, and the termination of the trust is contingent on events beyond her control. We do not discern from the trust language any intent for Misiaszek to benefit personally from any distribution of the trust principal.”
“In addition, we conclude that the terms of the Misiaszek trust do not permit Misiaszek to exercise her limited power of appointment for her benefit because doing so would require the trustee to violate her fiduciary duties to Misiaszek’s children as the ultimate beneficiaries of the trust principal. …
It is well-established that “a trustee holds `full legal title to all property of a trust and the rights of possession that go along with it.'” Ferri, 476 Mass. at 660, quoting McClintock v. Scahill, 403 Mass. 397, 399 (1988). See Welch v. Boston, 221 Mass. 155, 157 (1915) (“It is one of the fundamental characteristics of trusts that the full and exclusive legal title is vested in the trustee”). Despite holding a limited power of appointment, Misiaszek cannot herself disburse the trust principal because she no longer holds legal rights to the home held in trust. Practically speaking, then, Misiaszek would need to rely on the trustee to effectuate the appointment by having the trustee disburse the trust principal to the permissible appointee.Thus, in order for Misiaszek to appoint any portion of the trust principal to a nonprofit nursing home as payment, the trustee “literally and figuratively” would need to write the check to facilitate the appointment. This act, however, would violate the trustee’s fiduciary duties to Misiaszek’s children as the ultimate beneficiaries of the trust principal.”
A similar result was reached in Clark v. Sudders, 2019 Mass. Super. LEXIS 1680. There, settlor reserved “a limited or special power of appointment, exercisable during his (sic) lifetime by written instrument delivered to the Trustee, to appoint the remaining principal and any undistributed income of the Trust, outright or upon trusts, powers of appointments, conditions or limitations, to such person or persons (whether in equal or unequal shares) among the members of the class consisting of the Donor’s issue of all generations or charitable organizations other than governmental entities, but no such power or payment shall be used to discharge a legal obligation of the Donor.” The limited power did not create a circumstance where principal was available for distribution to settlor. See also Fillion v. Sudders, 2021 Mass. Super. LEXIS 1683.
Geyen v. Department of Human Services, 964 NW 2d 639 (Minn. Ct. App. 2021) [summary forthcoming]
In Trotta v. Dir. of the Office of Medicaid for the Exec. Office of HHS of Mass., 2019 Mass. Super. LEXIS 2224 (Superior Court 2019), a trust was established with a 20 year term that expired on March 23, 2010. Settlor also served as beneficiary. After the 20 year term expired, nothing was distributed and settlor continued residing in the trust property until she went to a nursing home in 2017. Medicaid argued the trust was available because the trust had not been distributed. The court found that after expiration of the trust term, the only power the trustee had was to wind up the trust; since she was not a beneficiary of the trust, she had no power to make distributions to herself.
Donna G. v. Dep’t of Health & Human Resources, 920 N.W.2d 668 (Neb. 2018) found that a testament trust is not subject to the any circumstance rule. It was undisputed that the original trust was testamentary, but an agreement was reached as part of probate of the applicant’s grandmother’s estate. That agreement added special needs provisions to the applicant’s trust share and continued it beyond age thirty. Medicaid argued that the agreement changed the nature of the trust, but the court stated “we are unpersuaded by DHHS’ contention that Eric’s Trust lost its testamentary character by virtue of the probate court proceedings.” The common law rule preventing modification of a testamentary trust was changed when the legislature adopted a statute “which expressly allow[s] for testamentary trusts to be affected by compromises.” “The question here is whether a testamentary trust which is modified by a court-approved compromise agreement retains its testamentary character for purposes of determining a beneficiary’s Medicaid eligibility. The answer to that question will depend on both the nature of the parties’ agreement and the court’s order approving it. But on this record, we conclude that neither the agreement to split the trust nor the court’s order approving that agreement changed the nature of Eric’s Trust from a testamentary trust into a self-settled or court-settled irrevocable trust.” The court then found that even though there were support terms in the trust, they were subject to the trustee’s discretion and the applicant could not compel a distribution.
Hallam v. Mo. Dep’t of Soc. Servs., 564 S.W.3d 703 (Mo. Ct. App. 2018) is an odd ball case involving a revocable inter vivos trust. The Bells each established a revocable trust and each deeded their one-half interest in real estate to their respective sole member LLCs. Each then conveyed their LLC interest to the respective trusts. In 2013, Mr. Bell conveyed his LLC interest to his wife, who then transferred it to her trust. Mrs. Bell died in 2014 and the trust assets were then transferred to her children. When Mr. Bell was admitted to a nursing home in 2015, he was denied Medicaid. The agency “concluded that the transfer of the homestead into Mrs. Bell’s trust by operation of law upon Mrs. Bell’s death via conveyance instruments executed before Mrs. Bell’s death were “dispositions” or “transfer” of assets for less than fair market value where the terms of the trust required distribution of the assets to Mrs. Bell’s children in exchange for no consideration.” The Court of Appeals agreed. The court then applied 1396p(d)(3)(B)(ii) to find that imposition of the transfer penalty was appropriate to the extent that, due to Mrs. Bell’s death, the trust became irrevocable, and no payment could under any circumstances could be made to Mr. Bell. Medicaid did, however, conceed that if the assets had been disposed of in Mrs. Bell’s Will, then the value of the transfer would have been limited to Mr. Bell’s elective share.
In Daley v. Sec. Exec. Office of Health and Human Services, 477 Mass. 188 (2017), two cases were before the Court. In each case, the Medicaid agency took the position that irrevocable trusts which owned a home were countable because the settlor retained the right to reside in the home. The Court concluded “that neither the grant in an irrevocable trust of a right of use and occupancy in a primary residence to an applicant nor the retention by an applicant of a life estate in his or her primary residence makes the equity in the home owned by the trust a countable asset for the purpose of determining Medicaid eligibility for long-term care benefits.”
Medicaid argued that the trust failed the any circumstances test. In discussing the any circumstanes test, the Court stated: “The effect of the test is that 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.”
“Under the “any circumstances” test, where the grantor of the irrevocable trust gives the trustee any “leeway to respond to emergency and unexpected circumstances,” the total amount available to be paid to address such circumstances is counted as fully available to the grantor, even if the trust provisions otherwise limit the trustee’s discretion to pay for long-term care. See id. at 418-420. Consequently, where the terms of an irrevocable trust give the trustee discretion to pay both income and principal to the grantor for various purposes, but limit that discretion in an attempt to assure the grantor’s eligibility for public assistance despite the considerable resources otherwise available to the grantor, the full amount of the trust, both principal and income, is the amount deemed available for purposes of determining Medicaid eligibility.
The “any circumstances” test is qualified by an important caveat: if the amounts that may be paid to the Medicaid applicant come only from the income of the trust, those income payments do not render the principal of the trust available as an asset; rather, they are treated as income that may affect the amount of Medicaid benefits to be received but not the applicant’s eligibility for such benefits. See Guerriero v. Commissioner of the Div. of Med. Assistance, 433 Mass. 628, 632 n.6 (2001); 130 Code Mass. Regs. § 520.026 (2013). See also J.A. Bloom & S.M. Cohen, Nursing Home MassHealth Eligibility, in Estate Planning for the Aging or Incapacitated Client in Massachusetts § 26.3.2 (Mass. Cont. Legal Educ. 4th ed. 2012 & Supp. 2015) (explaining general rule that anyone whose income is less than monthly cost of his or her nursing home may be eligible for MassHealth).”
Although this opens the door to planning which protects assets, it also carries risk. The settlor might run out of money and be forced to seek an allowance from his or her children. “If the grantor of the irrevocable trust leaves open even a “peppercorn” of discretion for the trustee to pay the grantor from the principal of the trust under any circumstance, the entire principal of the trust will be deemed available to the applicant and therefore will be treated as a “countable asset,” making the applicant ineligible for Medicaid benefits.”
The two cases before the court had different facts: ” in one, the home was transferred in fee simple but the terms of the trust granted the settlors the right of use and occupancy for their lifetimes; in the other, the settlors retained a life estate in the home and transferred only the remainder interest to the irrevocable trust.”
Citing HCFA 64, § 3259, the court found that a right to use or occupy a residence where the settlor had a right to income “is effectively making a payment to the grantors in the amount of the fair rental value of that property.” Therefore, the right of use or occupancy is not considered access to principal. “To illustrate with an example, if a grantor transfers to an irrevocable trust ownership of a condominium unit and the trustee decides to rent the unit to a third person and pay the rental income to the grantor, there is a payment of rental income from the trust to the grantor. If the grantor instead exercises his or her right of use and occupancy under the terms of the trust, and decides to reside in the unit or permit a family member to reside there without the payment of rent, the fair market value of the rent that otherwise would have been earned and treated as actual trust income is deemed paid to the grantor under Transmittal 64.” The right of use or occupancy, without more, is not a circumstane giving the trustee discretion to distribute equity or proceed from a sale of the home to the settlor. The judgment below was vacated because eligibility was denied solely on the basis that the settlors could reside in the homes.
The Court’s analysis did not stop there. Each trust authorized payment of the settlor’s tax obligations from trust corpus. Further, the first trust included a power of appointment to appoint “all or any part of the trust property … to any one or more charitable or non-profit organizations” over which they have no controlling interest.”
The court founds that MassHealth could determine whether the power to pay taxes on behalf of the settlors violated the any circumstanes rule. It could also deterine whether the power of appointment violated the any circumstances rule since approximately one-fourt of Massachusetts nursing homes operate as non-profits so settlor “could have used the assets of the trust, including his home, to pay the nonprofit organization for his care.” Both cases were remanded “to MassHealth to determine whether this portion of the corpus is a countable asset under the “any circumstances” test and to ascertain under § 1396p(d)(3)(B)(i) the size of the “portion of the corpus from which … payment to the individual could be made” in this circumstance.”
In Ala. Medicaid Agency v. Hardy, 202 So. 3d 690 (Ala. Ct. App. 2016), [summary forthcoming]
In Petition of Estate of Braiterman, 145 A. 3d 682 (NH 2016), the Supreme Court of New Hampshire denied certiorari where Medicaid found that an irrevocable trust failed the any circumstances test. The Court, however, issued an opinion explaining itself which doesn’t always happen when certiorari is denied.
Thea Braiterman established a trust in 1994, naming herself and her son as trustees. Both as settlor and as trustee, she retained certain powers over the trust. As settlor, she retained a power of appointment. As trustee, “the Trustee could “distribute, from time to time, to and among any one or more of the Legatees as may be living, so much of the principal or income of the Trust Fund at such time or times and in such amounts and proportions” as the trustee, in his or her “uncontrolled discretion, [deemed] advisable.” Although settlor was not a beneficiary, the trust included language suggesting that if she needed assistance paying for her care, her “hope [was] that if the Trust is terminated during the lifetime of the [applicant], any persons taking under this paragraph will use a portion of her gift to supplement the income and the governmental benefits and services to which the [applicant] may be entitled by reason of age, disability or otherwise. It is not the intention of the [applicant], however, to impose any legal obligation or trust.”
The court found that settlor’s retention of broad powers, both as settlor and as trustee, supported Medicaid’s argument that the trust failed the anycircumstances test. Although there was no evidence of collusion, arguably it was encouraged by the language expressing hope that settlor would be cared for. Using her retained powers, settlor could steer disbursement to legatees who would assist her; settlor arguably could condition a distribution to a Legatee upon that Legatee using the distribution for her benefit. “By virtue of these provisions and others, the circumstances under which payments from the Trust could be made to benefit the applicant in this case are not “entirely speculative,” Verdow, 209 F.R.D. at 316, but, rather, are specifically anticipated under the Trust Agreement.” The court concluded that, “[g]iven the facts of this case, we cannot say that there are no circumstances under which payments from the Trust could be made “for the benefit” of the applicant.”
In Heyn v. Director of the Office of Medicaid, 89 Mass. App. Ct. 312 (2016), the settlor’s trust held an annuity. Income was payable to settlor, but principal was retained in the trust and allocations between income and principal were constrained by accounting principles and state law. “Annuity payments are comprised of distinct constituent parts. One part is a return of a portion of the principal investment in the annuity itself; the other part is a portion of the investment income earned on the principal investment. Following each payment, the remainder of the principal investment remains in the annuity contract, accruing income. Federal Medicaid law recognizes these distinguishable parts, as does the United States Internal Revenue Code. See, e.g., 42 U.S.C. § 1396p(e)(2)(B) (2012) (distinguishing between the amount of an annuity’s “income or principal” being withdrawn); 26 U.S.C. § 72(a) & (b) (2012). Out of each annuity payment, only the investment income portion would be available for distribution to the grantor from the trust, that portion of each payment representing a return of capital would be required by the trust instrument to be retained in the trust.”
The trust included a power to appoint all or any part of trust principal to one or more of settlor’s issue free of trust. “[A] provision making trust principal available to persons other than the grantor does not by its nature make it available to the grantor, any more than if the grantor had gifted the same property to such a person when she created the trust, rather than placing it in trust. Indeed, the continuing authority of the trustee in Guerriero to distribute trust principal to beneficiaries other than Guerriero following Guerriero’s irrevocable waiver of rights to receive principal did not derogate from the court’s conclusion that the trust principal should not be treated as countable assets for purposes of determining Guerriero’s eligibility for Medicaid benefits. See 433 Mass. at 635. More generally, for purposes of computing countable assets, Medicaid does not consider assets held by other family members who might, by reason of love but without legal obligation, voluntarily contribute monies toward the grantor’s support.”
The trust included a grantor trust provision allowing settlor to substitute assets of equivolent value. “Such an exchange would be equivalent to a sale of trust assets, with the grantor in the role of purchaser and the proceeds of the sale nonetheless retained by the trust as principal. Such a transfer would not effect any distribution or diminution of trust principal, any more than a sale of trust assets to unrelated third parties, followed by a reinvestment of sale proceeds by the trust.”
In Edholm v. Minn. Dep’t of Human Serv. (Minn. Ct. App. 2013), the court upheld a decision that a trust was available because the grantor retained significant control over the trust. A provision in the trust provides: “The Trustmaker hereby reserves the right to borrow income or principal of the trust without providing adequate interest and/or without providing security for the loan. The purpose of this provision is to cause this trust to be a Grantor Trust under I.R.C. Section 675(3) and the applicable Treasury regulations.” Borrowing from the tax code, the Court found that settlor was treated as owner of the trust, which supported Medicaid’s decision to include the trust as an available resource.
In In re Rosckes v. County of Carver, 783 N.W.2d 220 (Minn. Ct. App. 2010) an irrevocable trust was available because the trustee had discretion to pay income and principal to the settlor. “In the case of an irrevocable trust, when there “are any circumstances under which payment from the trust could be made to or for the benefit of the individual,” those portions of the income from or corpus of that trust are “resources available to the individual” for the purposes of state medical-assistance programs.” The trustee’s discretion was a circumstance underwhich assets could be transferred to the settlor.
In Bates v. Henneberry, 211 P.3d 68 (Col. Ct. App. 2009), settlor established the “Bates Irrevocable Trust” (Trust) for the benefit of her son, his spouse, and their descendants. Bates funded the Trust by contributing $ 115,000.00. Although the Trust instrument stated that contributions by Bates were intended to be completed gifts, it also allowed the Trustee to make unsecured loans to “any person.” This power was deemed, by the courts below, to create a circumstance under which settlor could receive trust distributions. Although the appellate court would likely reach the same conclusion if it reached that point, the applicant’s petition for judicial review was untimely and the court held she did not have a right to make a section 1983 claim. See also Hamel v. Sudders, 2020 Mass. Super. LEXIS 75 (Superior Ct. 2020) (reaching similar result).
In Doherty v. Director of the Office of Medicaid, 908 NE 2d 390 (Mass Ct. App. 2009), the court affirmed the decision below that a trust was an available resource because the trustee’s discretion was broad enough to make distributions to or for the benefit of the settlor. “When considered as a whole, what strikes us most strongly is that Muriel’s trust constitutes a remarkably fluid legal vehicle, intelligently structured to provide both Muriel and the trustees maximum flexibility to respond to Muriel’s changing life needs. Indeed, embedded in the trust’s governing recitation is not only an explicit assessment that public or other charitable benefits will likely be insufficient to provide Muriel the quality of life she might desire, but the corollary implicit direction for the trustees, in such case, to invade assets to make up that difference. Which is not to say that specific trust provisions do not confer this authority, but is rather simply to observe that the trust vehicle, considered as a whole, evidences Muriel’s expectation or intent that the trustees will invade trust assets when necessary to ensure Muriel’s comfort. In this light, we cannot say that MassHealth’s determination — that the whole of the trust’s corpus constitutes a “countable asset” for the purpose of determining Muriel’s Medicaid eligibility — is as matter of law infirm.”
Vincent v. Dep’t of Human Serv., 910 N.E.2d 723 (Ill Ct. App. 2009) was decided under 42 U.S.C. §§ 1396a(k) because the trust was established prior to 1993. The trust was deemed available because it could make payments for the applicant’s benefit. The test was not whether trust assets were paid out for the applicant’s benefit, but whether they could have been paid out for her benefit.
In Daily v. DHS, 228 P. 3d 1199 (Okla. Ct. App. 2009), the community spouse established an irrevocable trust payable to her and funded it with the institutionalized spouse’s assets Contraty to Hegadorn (decided in 2023), the court found that “to the extent it is payable to Wife, is a resource available to Husband.” The court reasoned that “payments to the spouse benefit the transferring individual.”
Thorson v. Nebraska DHHS, 740 NW 2d 27 (Neb. 2007) involved a trust established prior to 1993, so 42 U.S.C. § 1396a(k) rather than 42 U.S.C. § 1396p(d)(3)(B) applied. The trust was properly treated as an available resource because “[u]nder the terms of the Trust, the trustee is authorized to pay to or apply for the benefit of Thorson the entirety of the Trust’s assets in order to supplement any benefits Thorson may receive from any local, state, or federal government.”
Pohlmann v. Nebraska Dept. of Health & Human Servs., 271 Neb. 272 (Neb. 2006) [summary forthcoming]
Wilson v. Neb. Dep’t of Health and Human Serv., 718 N.W.2d 544 (Neb. 2006) involved a determination of which look-back applied, the 36 month look-back for transfers made by an individual, or the 60 month look-back for transfers from a trust. The exact dispute is unlikely to reoccur since the look-back rules changed on February 8, 2006. Because the applicant was entitled to distributions of income and principal, her transfer of property to her sons was deemed a transfer by her and subject to the 36 month look-back.
James v. Richman, 465 F. Supp. 2d 395 (M.D. Penn. 2006)
Johnson v. Guhl, 357 F.3d 403 (3rd Cir. 2004)
Gayan v. Illinois Dept. of Human Services, 796 NE 2d 657 (Ill. Ct. App. 2003) [summary forthcoming]
Boruch v. Nebraska Dept. of Health, 659 NW 2d 848 (Neb. Ct. App. 2003) is an early decision which improperly conflates the income or corpus analysis under 42 U.S.C. § 1396p(d)(3)(B). The decision below, which was affirmed, found that the trust failed the any circumstances test. IN applying that test, the Nebraska Court of Appeals found that “if a person establishes an irrevocable trust with his or her assets and the individual is able, under any circumstances, to benefit from the corpus of the trust or the income derived from the trust, the individual is considered to have formed a trust which is counted in the determination of Medicaid eligibility.” This ignores the plain test of (d)(3)(B) which states “the portion of the corpus from which, or the income on the corpus from which,” shall be available. The settlor did retain the right to use the trust corpus, but as subsequent decisions make clear, a right to use realty is not a payment or distribution as described in HCFA 64.
Guerriero v. Commissioner of the Division of Medical Assistance, 433 Mass. 628 (Mass. 2001) was decided under 42 U.S.C. § 1396a(k), the precursor to 1396p(d)(3)(B) because the trust was established prior to 1993; the “1993 amendments apply only to trusts created after the effective date of the statute.” Applying trust princples, the Court found that the trust in this case was not available to the settlor/applicant because a prior irrevocable waiver deprived the trustee of any discretion to distribute trust princpal to the settlor. “If the beneficiary transfers his interest and the trustee makes a payment or conveyance to the transferor-beneficiary when the trustee has notice of the transfer, the trustee is liable to the transferee.” Restatement (Second) of Trusts, supra at § 226 comment c, at 524-525. “When Guerriero signed her “irrevocable waiver,” she effectively transferred her interest back to the trust for the benefit of the remaining beneficiaries. Once the trustee of the trust had knowledge of Guerriero’s “irrevocable waiver,” the trustee was deprived of any legal discretion to pay trust principal to Guerriero. Restatement (Second) of Trusts, supra at §§ 210 comment d & 226 comment c.” Medicaid argued that the waiver was ineffective because the settlor had no right to alter, amend or modify the trust, but the Court found that ignored her dual role as settlor as as beneficiary. The fact that no provision in the trust restricted her right as beneficiary to alienate her interet meant she was free to transfer it.
[Research based on Lexis search in allstates and allfederal on or around 6/3/2024 using following search parameters: medicaid and trust and 1396p and “any circumstances”]
(Text as of 5/30/2024)
(d) Treatment of trust amounts
(1) For purposes of determining an individual’s eligibility for, or amount of, benefits under a State plan under this subchapter, subject to paragraph (4), the rules specified in paragraph (3) shall apply to a trust established by such individual.
(2)
(A) For purposes of this subsection, an individual shall be considered to have established a trust if assets of the individual were used to form all or part of the corpus of the trust and if any of the following individuals established such trust other than by will:
(i) The individual.
(ii) The individual’s spouse.
(iii) A person, including a court or administrative body, with legal authority to act in place of or on behalf of the individual or the individual’s spouse.
(iv) A person, including any court or administrative body, acting at the direction or upon the request of the individual or the individual’s spouse.
(B) In the case of a trust the corpus of which includes assets of an individual (as determined under subparagraph (A)) and assets of any other person or persons, the provisions of this subsection shall apply to the portion of the trust attributable to the assets of the individual.
(C) Subject to paragraph (4), this subsection shall apply without regard to—
(i) the purposes for which a trust is established,
(ii) whether the trustees have or exercise any discretion under the trust,
(iii) any restrictions on when or whether distributions may be made from the trust, or
(iv) any restrictions on the use of distributions from the trust.
(3)
(A) In the case of a revocable trust—
(i) the corpus of the trust shall be considered resources available to the individual,
(ii) payments from the trust to or for the benefit of the individual shall be considered income of the individual, and
(iii) any other payments from the trust shall be considered assets disposed of by the individual for purposes of subsection (c).
(B) In the case of an irrevocable trust—
(i) if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources available to the individual, and payments from that portion of the corpus or income—
(I) to or for the benefit of the individual, shall be considered income of the individual, and
(II) for any other purpose, shall be considered a transfer of assets by the individual subject to subsection (c); and
(ii) any portion of the trust from which, or any income on the corpus from which, no payment could under any circumstances be made to the individual shall be considered, as of the date of establishment of the trust (or, if later, the date on which payment to the individual was foreclosed) to be assets disposed by the individual for purposes of subsection (c), and the value of the trust shall be determined for purposes of such subsection by including the amount of any payments made from such portion of the trust after such date.
(4) This subsection shall not apply to any of the following trusts:
(A) A trust containing the assets of an individual under age 65 who is disabled (as defined in section 1382c(a)(3) of this title) and which is established for the benefit of such individual by the individual, a parent, grandparent, legal guardian of the individual, or a court if the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter.
(B) A trust established in a State for the benefit of an individual if—
(i) the trust is composed only of pension, Social Security, and other income to the individual (and accumulated income in the trust),
(ii) the State will receive all amounts remaining in the trust upon the death of such individual up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan under this subchapter; and
(iii) the State makes medical assistance available to individuals described in section 1396a(a)(10)(A)(ii)(V) of this title, but does not make such assistance available to individuals for nursing facility services under section 1396a(a)(10)(C) of this title.
(C) A trust containing the assets of an individual who is disabled (as defined in section 1382c(a)(3) of this title) that meets the following conditions:
(i) The trust is established and managed by a non-profit association.
(ii) A separate account is maintained for each beneficiary of the trust, but, for purposes of investment and management of funds, the trust pools these accounts.
(iii) Accounts in the trust are established solely for the benefit of individuals who are disabled (as defined in section 1382c(a)(3) of this title) by the parent, grandparent, or legal guardian of such individuals, by such individuals, or by a court.
(iv) To the extent that amounts remaining in the beneficiary’s account upon the death of the beneficiary are not retained by the trust, the trust pays to the State from such remaining amounts in the account an amount equal to the total amount of medical assistance paid on behalf of the beneficiary under the State plan under this subchapter.
(5) The State agency shall establish procedures (in accordance with standards specified by the Secretary) under which the agency waives the application of this subsection with respect to an individual if the individual establishes that such application would work an undue hardship on the individual as determined on the basis of criteria established by the Secretary.
(6) The term “trust” includes any legal instrument or device that is similar to a trust but includes an annuity only to such extent and in such manner as the Secretary specifies.
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