In determining eligibility for MassHealth and Supplemental Security Income (SSI), the state and federal agencies treat self-settled trusts—those created by the applicant for benefit—and third-party trusts—those created by someone else—entirely differently. The assets held in a self-settled trust are considered available to the applicant for benefits to the extent the trustee has discretion to distribute them to the applicant or to use them for her benefit. The assets of a third-party trust are only considered available to the extent the trustee actually distributes them to or uses them for the applicant for benefits.
These rules track the rules for creditors. With some exceptions, creditors can gain access to assets in trusts created by the debtor and cannot gain access to trusts created by someone else for the benefit of the debtor. The issue in the case of Calhoun, et al. v. Rawlins (93 Mass. App. Ct. 458, June 27, 2018) is whether a trust created by one divorcing spouse for the benefit of the other spouse is protected from the creditors of the beneficiary spouse. This has significance for special needs planning because it's not unusual for a special needs trust to be created in the context of divorce.
Car Accident, Then Divorce
In the case of Calhoun v. Rawlins, Brian K. McInerney suffered a severe traumatic brain injury in a car accident in 2001. In 2007, he and his wife, Susan J. Stone, divorced. Under the terms of the divorce, Stone transferred 35% of her substantial inherited assets, more than $4 million, into a trust for the benefit of McInerney during his life, with the remainder passing to their two surviving children. (One died in the car accident.)
Second Accident and Lawsuit
In 2014, McInerney died in another automobile accident that was alleged to be his fault. The occupants of the car he hit, Shonna Calhoun and her minor son, sued McInerney's estate and the lower-court judge determined that the trust funds were available to pay damages only to the extent that McInerney contributed his own funds; those contributed by Stone were protected because she was a third party. Calhoun appealed.
Appeals Court Disagrees
The Appeals Court here overturns the trial court, finding:
The motion judge's focus on the source of the funds was misplaced because it ignored the fact that assets previously held in Stone's name were transferred to the trust in settlement of her obligations to McInerney upon the dissolution of the marriage, not as a gift. . . . McInerney's agreement to settle his rights and obligations pursuant to the dissolution of the marriage was the consideration for the creation of the trust. Stone was not gifting her money to McInerney; she was satisfying her obligations arising from the dissolution of the marriage. Accordingly, McInerney had a legal right to the monies that funded the trust.
In short, McInerney's trust is self-settled and its funds were available to his creditors.
Why This is Relevant to Special Needs Planning
This decision has significance in the area of special needs planning due to the correlation in the treatment of trusts between the rights of creditors and the accessibility of assets for determining eligibility for MassHealth and SSI. Presumably, should this issue come before a court in the context of whether the assets in a trust created as part of a trust are considered available for purposes of determining eligibility for public benefits, a court will treat the trust as self-settled. For this reason, it's advisable that the trust be drafted as a (d)(4)(A) trust, which falls into a safe harbor for both MassHealth and SSI purposes. The trade off is that upon the beneficiary's death, any funds remaining must first go to reimburse MassHealth for its expenditures on the beneficiary's behalf. Only if there's money remaining after MassHealth is fully reimbursed can they pass on to the beneficiary's family.