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