Over the last couple of years, MassHealth has been rejecting irrevocable trusts containing terms that it had accepted up until recently. Since many seniors use irrevocable trusts to shelter assets as part of long-term care planning, this has resulted in much uncertainty and cost due to the need for administrative and court appeals. Fortunately, as more cases have gone through the lengthy appeal process litigants are having increasing success in defending the trusts. We can report that my partner, Jeffrey A. Bloom, recently was successful in defending our standard irrevocable trust instrument at an administrative fair hearing.
In Alice O'Leary v. Kristin Thorn (Worcester Sup. Ct. WOCV2013-02013A, Sept. 18, 2014), the applicant was not so successful at fair hearing and had to appeal to superior court. Fortunately, she was successful there.
In this case, Ms. O'Leary transferred assets into an irrevocable trust which provided that she was to receive the income and that principal could be paid out to other beneficiaries but not to her and her husband. At issue was another provision of the trust which provided:
The Trustee may apply any or all of the income or principal of any share or portion of the Trust to or for the benefit of any beneficiary and through such agencies as the Trustee deems advisable instead of paying it directly to the beneficiary or his or her guardian.
MassHealth deemed that this provision meant that the trustee could make distributions to Ms. O'Leary or her husband making the trust funds countable in determining her eligibility for benefits. She argued that the purpose of this provision was simply to permit distributions to others on behalf of beneficiaries, not expanding any rights beneficiaries may have under other terms of the trust.
The Court in its decision agrees with Ms. O'Leary,stating that the provision in question must be read in the context of the entire trust:
Article Seventh seems designed to protect the Trustee in the event that he elects to make a payment to a third party for the benefit of a beneficiary. While, perhaps not the clearest of language, this Article does not seek to include a new power to the Trustee in contradiction to the specific instructions listed in Article Second. . . . This is in keeping with the clear intention of the Grantors and consistent with the specific language and instructions given throughout the Trust document.
The Court also addresses two other arguments made by MassHealth. First it distinguishes from the case of Cohen v. Commissioner of Medical Assistance, 423 Mass 399 (1996), in which the Supreme Judicial Court held that trusts funds will be countable if there is even a "peppercorn" of discretion to make distributions:
The Cohen trusts allowed the trustee to give some of the principal to the grantor but limited the amount to an amount that would not jeopardize public assistance. The Trust in this case limits who the principal can go to (not the amount that can go) and does not allow any discretion to gvie any principal to the plaintiff. This is a significant and persuasive distinction.
Finally, MassHealth argues that the existence of a so-called power of substition in the trust, which for tax purposes permits the grantor to exchange property of equal value with trust property, make the trust countable. The Court rebuffs this argument as follows:
Article Nine simply allows the plaintiff to substitute an asset in the trust for another asset of equal value. Article nine does not expand the Trustee's powers of distribution. Any assets substittuted into the Trust under this provision are still bound by the restrictions listed in Article Two, discussed above.
In short, this is another case in which a court or fair hearing officer rejects MassHealth's groundless attacks on a legitimate, and previously accepted, planning technique. Unfortunately, MassHealth's attacks on irrevocable trusts continue to waste resources of seniors and of already overworked fair hearing officers and courts.