Planning for Life

Trust Reformation Causes MassHealth Penalty

Posted by Harry S. Margolis on November 3, 2015

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By Harry S. Margolis

The Massachusetts Court of Appeals in Needham v. Director of the Office of Medicaid (Mass. App. Ct. 14-P-182, October 20, 2015) rules that the reformation of a trust causes a period of ineligibility for MassHealth coverage of nursing home care.

Case History

In 1999, Maurice Needham transferred his home to an irrevocable trust that directed the trustees to use the principal for his future needs without regard to the interests of the remaindermen, his children. By February 2011, Mr. Needham had moved to a nursing home and applied for MassHealth coverage. At that time the house was valued at $412,400. His application was denied because the trust was deemed countable since the trustee had the power to distribute trust principal to Mr. Needham.

Mr. Needham's attorney asked that the administrative appeal of the denial be stayed while he went to the probate court to request that the trust be reformed ab initio -- back to the original creation of the trust -- to bar the distribution of principal to Mr. Needham, thus making it noncountable for purposes of determining eligibility for MassHealth coverage. The probate court approved the modification and Mr. Needham revived the administrative appeal of his denial arguing that now that the trust assets were noncountable, his application should be approved. The hearing officer disagreed, ruling that since the reformation occurred with the preceding 60 months -- the so-called "look back" period -- it should be considered a transfer of assets causing Mr. Needham to be ineligible for approximately 45 months under the transfer penalty formula.

Mr. Needham appealed to superior court, arguing that since the reformation was approved ab initio and MassHealth is bound by the decisions of Massachusetts courts, then it should treat the reformation as having occurred back in 1999 when the trust was created. The court agreed, overturning the denial and directing that Mr. Needham be granted MassHealth coverage.

The Decision

MassHealth appealed to the court of appeals, which in this decision disagrees. It rules that while the trust reformation is effective in rendering the trust assets noncountable, "it is the fact of the reformation itself that constitutes the disqualifying event." It reasons further:

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.

The court overrules the superior court decision and affirms that of the hearing officer denying MassHealth coverage for Mr. Needham.

Conclusion

This was the right decision. While we often disagree with MassHealth's treatment of irrevocable trusts, seeking any potential (and often imaginary) loophole to have their assets deemed available and countable to the applicant for benefits, in this case we feel that Mr. Needham's lawyer went several steps too far, likely at great cost to the client, in seeking to change the facts on the ground. However, without seeing the original trust itself, I wonder whether it might have passed muster back in 1999 and the attorney may have been seeking any possible avenue to fix the situation created not by the terms of the trust but by MassHealth's evolving treatment of trusts over time.

Topics: trusts, long-term care planning, nursing homes, MassHealth

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