Changing a Trust to reduce your access to funds can cause a Medicaid transfer penalty

In Maurice Needham vs. Director of the Office of Medicaid, the Massachusetts Court of Appeals upheld a transfer penalty imposed by the State Medicaid program after the Medicaid applicant obtained a court order amending his trust. There was a revocable Trust containing Needham’s house, and an irrevocable Trust for Needham’s benefit which was the sole beneficiary of the revocable Trust. Needham had created both Trusts (he was the “settlor.”) In the Irrevocable Trust, the trustee was directed to accumulate the principal and to use it for Needham’s future needs without regard to the interest of the remaindermen (his children). When Needham applied for Medicaid benefits, the Agency concluded that the assets in the Trusts were countable, available assets, and denied his application due to excess resources because under federal law, the Medicaid applicant is only allowed to have $2,000 in countable available resources.

After requesting an administrative hearing/appeal, Needham went to Court and sought a court order reforming the irrevocable Trust, to remove him as the beneficiary. This “reformation” was ordered by the Court based on a Stipulation signed by Needham and the co-Trustees, and the order said it was effective “ab initio,” meaning, back to the beginning of the Trust. Next, in the administrative tribunal, the Administrative Law Judge decided that the action to reform the Trust was an uncompensated  transfer of assets, and that a transfer penalty would be imposed which would delay the receipt of benefits. The next appeal was to the Courts. The trial court reversed the administrative ruling, and decided that it was bound by the Court order and that “ab initio,” the Trust only existed in a form which would not be a countable resource. On appeal by the State, the Massachusetts Appeals Court reversed.

The Court explained its rationale as follows: “The issue before us is not whether the trust was reformed as a matter of State law. The issue is whether MassHealth is required to recognize a reformation as a matter of Federal law when determining whether there has been a disqualifying transfer. The answer to that question in this case is no. Were the answer different, persons of means would be permitted to enjoy otherwise countable assets held in trust throughout their lives, transfer those assets for less than fair market value by reforming the trust ab initio when their health declines, and thereby obtain Medicaid payment for long-term nursing home care without complying with the waiting period imposed by Federal law.”

There is a limit on the resources a Medicaid applicant can have.  When it comes to a Trust that is created with the assets of the applicant or their spouse which is not a bona fide Special Needs Trust , federal law at 42 USC 1396p(d)(3)(B) says that “(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.” New Jersey’s counterpart regulation is at NJAC 10:71-4.11.

 The related legal issue is that when an individual takes action to reduce his access or ownership of an asset, there is generally the risk that a transfer penalty will be imposed if he applies for benefits within 5 years of doing that. 42 USC 1396p(c) [federal law] and NJAC 10:71-4.10.

 There are times that a Trust has to be reformed because the way it is written is a mistake on the part of the scrivener (the person who wrote the trust) or the way it is written doesn’t match up with the intention of the settlor. Court proceedings for trust reformation are not uncommon. However, what looks like an ordinary state court proceeding can have an unexpected impact on Medicaid eligibility — that’s the “law of unintended consequences.” Now, the judges in New Jersey make a point of telling such parties that while the Court has jurisdiction to enter the relief the party is looking for, the court cannot make a determination about the impact the action may have with regard to Medicaid eligibility. That is an issue between the applicant, the agency, and federal law. Matter of A.N.

As I like to say, careful planning can prevent a crisis. The best time to avoid potential Medicaid eligibility problems is before the cows are out of the barn, and well before they kick the lantern over and set the  on shed on fire (I’m giving a nod to Miss O’Leary of folk song fame).

Call for advice on Medicaid eligibility, trust reformation, and preparation of Medicaid applications … 732-382-6070

Trust Reformation? What’s that?

Trusts are prepared with an eye toward longevity. A trust is designed to protect assets for benefit of a  beneficiary, both now and for the future. The Trust will specify who will manage it now (the Trustee) and will typically contain a list of successor trustees who can step in later if necessary, and a mechanism for someone to appoint a successor Trustee if there ever is an unfilled vacancy. The Trust is for the living and the not-yet-born. The Trust will specify who receives the funds if a beneficiary dies. The trust will specify the terms and limitations on distributions. A Trust may last for one lifetime or may morph into another form after the death of the primary beneficiary.

Sometimes, the trust is not written in a way that correctly addresses the concerns of the person who established the trust. This could be due to an error or misunderstanding on the part of the “scrivener” (the person who actually “wrote” or prepared the trust). Sometimes, laws that control the effect of such trusts may change, and the original creator (grantor) may not even know it. And sometimes, the original purpose of the Trust is being frustrated due to a change in circumstances after many years. The Trustee of the Trust may discover that certain language in the original trust has now created ambiguities, or is making the beneficiary ineligible for governmental benefits when they should have been eligible.A Trust that was erroneously written as a general discretionary trust may need to be amended to be a special needs trust. What can be done if it’s an irrevocable trust? Generally, a court petition will be needed, and this is called “trust reformation.”

There are two primary legal theories on which a court in New Jersey can “reform” or amend an irrevocable trust. One theory is “scriviner error” — the scriviner knew what needed to be done, and what the grantor wanted, but made an error in the way s/he wrote the trust. The other theory is that it is necessary to reform the Trust to conform to the grantor’s intent — circumstances or laws have created a vacuum within the trust, there’s a lack of clarity as to whether a certain person is intended to be a beneficiary, or law has changed and more specific language is now required in order to adequately protect the Beneficiay the way the grantor wanted.

The party who petitions the court must prove by “clear and convincing evidence” that the amendments should be done and are consistent with the grantor’s actual intentions. The original scriviner of the trust may have to be subpoenaed to testify. Everyone who has a stake in the trust will have to be given Notice of the proceeding. While the court will rely heavily on the express terms of the document, extrinsic evidence can be presented in these cases. Substantial proof will be required, and often that proof must relate back to the time the Trust was created.

When legal problems occur, the law provides a remedy. Don’t despair – just call a lawyer.

For representation on estate and trust planning, special needs and elder care, call … 732-382-6070