What to Do About Doherty

By Harry S. Margolis

A common practice of seniors who are planning ahead to protect their estates from the potential high costs of long-term care is to place their homes, and sometimes other assets, into irrevocable trusts. Trusts protect the homes so the owners can continue to live in them for as long as they choose and provide certain tax advantages for themselves and their children.

 

In exchange for those protections, certain trade-offs exist. First, the transfer of property into trust causes five years of ineligibility for MassHealth, the public health care program that covers long-term nursing home care. Second, the owners must give up control of the property. Once in the trust, they can no longer remove the property from the trust or even borrow against it to pay for whatever they may need. On the other hand, they may receive income earned on the trust property and the trust may sell the home and purchase another residence.

 

The Doherty Trust

 

Unfortunately, to be blunt, in the case of Muriel Doherty v. Director of the Office of Medicaid (Ct. App. No. 08-P-939, June 18, 2009), an attorney pursued MassHealth eligibility for a client who had transferred her home to a poorly-drafted irrevocable trust. The concern is that MassHealth may apply the decision to well-drafted irrevocable trusts.

 

The Doherty trust included the following troubling elements:

 

  1. While the trust did not permit principal distributions to Mrs. Doherty, it contained the contradictory provision that it "shall be used in ways that will best enable the SETTLOR to lead as normal, comfortable and fulfilling life as possible."
  2. It further directed the trustee to "accumulate the Trust principal to the extent feasible, due to the unforeseeability of the SETTLOR’S future needs."
  3. The trust contained a provision permitting the distribution of all of the trust property to "the beneficiaries" in the event the trustee determined that it was no longer economical to continue the trust.
  4. The trust permitted the trustee to "determine all questions as between income and principal."
  5. It further permitted Mrs. Doherty to direct the distribution of trust property to other family members either during her life or upon her death.

 

In considering the trust, the Appeals Court unsurprisingly finds “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,” and agrees with MassHealth that the trust assets may be considered available to Mrs. Doherty when considering her eligibility for benefits.

 

What This Means for Drafting Irrevocable Trusts

 

So, the question arises as to whether this decision has implications for better-drafted irrevocable trusts. The one feature the Doherty trust has which is found as part of the trustee powers in most trusts is the ability to determine what is income and what is principal. The concern is that where the trusts provide that income may be distributed to the grantor, MassHealth may take the position that the trustee has the power to deem all of the trust property as income.

 

Fortunately, the Doherty court addresses this question as follows:

 

Muriel argues, with some persuasiveness, that these and other similar provisions are, at most, economically meaningless administrative boilerplate, that in light of the explicit provision to the contrary they do not confer upon the trustees any discretionary authority to invade principal for Muriel's benefit. To some extent, this is so. We doubt, for example, that the trustees may, willy-nilly, simply characterize a trust asset as "income" and thereby, free of fiduciary fault, convey that asset to Muriel free of trust.

 

Despite that apparent inoculation of this provision, we recommend removing it from irrevocable trusts designed for MassHealth planning purposes. That, of course, helps for new trusts, but what about existing irrevocable trusts?

 

What This Means for Existing Trusts

 

While they are irrevocable, many trusts allow amendments of purely administrative terms such as the one in question. The problem, however, is that making such a change could be deemed to restart the five-year waiting period for MassHealth eligibility. Further, making such an amendment will no doubt catch the attention of MassHealth if an application is made during the subsequent five years.

 

MassHealth could argue, that the change was substantive and should restart the five-year waiting period, or why else would the client an attorney have bothered to have made the change? It would be hard for the attorney and client to argue that the amendment was not substantive since there would be little reason to have made the change in that event.

 

We agree with the Doherty court that the ability of the trustee to determine what is income and what is principal is not unfettered. It is simply included in trusts to protect the trustee’s reasonable determinations from being challenged by beneficiaries. Therefore, existing trusts with this provision, which do not include other provisions found in Mrs. Doherty’s trust, need not be changed.

 

However, anyone with an irrevocable trust designed for MassHealth planning purposes would do well to have it reviews by an elder law attorney in light of the Doherty decision. 

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