Trust law versus Medicaid law

Issue August 2011 By Albert Gordon

Even a trust written more than 20 years ago might not protect your assets if you should require nursing home benefits today.

On March 28, 1989, "John Smith" (a pseudonym) had a trust document drafted naming himself as the trustee. He signed the document and acknowledged $10 placed into the trust. More funds were added to the trust over the years. The right to amend the trust is his alone, and is not shared with any other person, his guardian or his attorney-in-fact.

Upon his death, any funds in the trust were to be set aside as a separate trust, termed the residuary trust. His wife, "Sally," and his son "Larry" (from a previous marriage) were named successor trustees. If Sally survived him, any funds in the trust were to be paid to her on at least a quarterly basis during her lifetime.

Additionally, the trustee had the option to pay such sums from principal as deemed necessary to maintain her health and comfort, considering her income from all sources known to the trustee. Upon Sally's death, his son, as successor trustee, would become the sole trustee.

John Smith died outside the five-year lookback period. His wife, Sally, became incapacitated and entered a nursing home on Aug.18, 2010. Her daughter and power of attorney "Mary Smith," who was not a residual beneficiary of the trust,
applied to MassHealth to obtain payment for nursing home services. On Sept. 1, 2010, MassHealth denied the application due to excess assets, most of which was the principal remaining in the trust. The MassHealth agency declared the trust to be a Medicaid qualifying trust and countable as an asset (semantically speaking, a Medicaid qualifying trust should be called a Medicaid disqualifying trust).

This case was referred to me on Sept. 14, 2010, and I informed Mary, the power of attorney, to fax a request for a hearing to the local MassHealth office based on the denial notice. Practice note: This applies to hardship requests. Regular appeals are sent to the Board of Hearings office in Quincy.

While a denied applicant has 30 days to request a fair hearing under normal circumstances, a request for hardship appeal must be submitted within 15 days of the date of the denial. The denied applicant has 30 days to request a fair hearing based on the denial of a hardship application. However, hardship applications are routinely denied by the agency.

I filed a request for a fair hearing with the Board of Hearings based on Sally's lack of access to trust principal. This is to follow procedural time limits, since the hardship issue wouldn't be answered prior to the 9/30/2010 deadline for filing a regular appeal based on the 9/1/2010 notice. If I didn't prevail at the regular appeal, I would have the opportunity to appeal the hardship issue, and by that time, the nursing home may have sent out a notice to discharge (a requirement of a hardship appeal) to my client, Sally.

The hearing was held on Dec. 10, 2010. The MEC didn't act on the hardship appeal, since they maintained a decision would not be made on a hardship appeal until the other appeal issue had been decided.

My argument is based on lack of access to the trust principal, not upon the countable status of the trust.

Larry Smith, the trustee, hired a law firm experienced in trust litigation to defend his position of not paying any trust principal on Sally's behalf. I had several conversations with the attorney involved, and he sent two letters stating the trustee's position. Both letters were entered into evidence at the Dec. 10 hearing.

At the hearing, we provided evidence that Sally has no funds to mount a legal action to gain access to trust principal. The trustee has access to trust funds to defend against an action and has made it clear that he will defend the trust. From the questions asked by the hearing office, it was clear that the hearing officer understood Sally's dilemma of having no means to bring an action against the trustee.

Yet on March 11, 2011, the hearing officer made a decision against my client based upon Cohen V. Commissioner of the Division of Medical Assistance, 423 Mass. 399, 413 1996).

I contacted the MassHealth representative by telephone to determine what action was necessary to have the hardship appeal acted upon now that we had an appeal decision. Unable to get a definitive answer, I sent the representative a letter requesting a decision to preserve my client's rights. I subsequently received a denial of the hardship request and have filed a request for an appeal.

Meanwhile, the nursing home engaged an attorney to explore the feasibility of bringing an action against the trustee since the facility was owed a substantial amount of money. The nursing home issued a notice of discharge, which I appealed. At the hearing on June 17, 2011, I introduced evidence preventing the nursing home from discharging my client.

To avoid a nightmare scenario such as this, proposed legislation (House Bill 2086 and Senate Bill 0490) have been introduced to establish criteria to be used by MassHealth to determine whether a penalty for a transfer of assets would constitute an undue hardship to an applicant. On July 19, 2011, I testified in favor of the above bills in front of the Massachusetts Joint House-Senate Committee on Health Care Financing.

One of the current requirements for a hardship waiver is that the nursing home must issue a discharge notice. Since I blocked the nursing home from discharging my client at one appeal hearing prior to the hearing on the hardship issue, does this mean we will lose the hardship appeal because there is no pending discharge action by the nursing home? Will the nursing home have to issue another discharge action which I will appeal to protect my client? The current regulations cause harm to the elderly residents of Massachusetts.

This legislation would create a rebuttable presumption establishing that the applicant would be granted a waiver of the ineligibility period if certain criteria are met. The criteria in the legislation specify that the denial of MassHealth would create a risk of serious harm to the individual, that the assets are irretrievable from the recipient and that there is no affordable alternative care available for the individual. If the individual meets all of the criteria, a waiver will be granted unless the agency presents convincing evidence to the contrary. Hopefully, this will level the playing field and applicants will no longer be punished for situations beyond their control.

The above case material is from a seminar I gave on behalf of the Massachusetts Bar Association's Probate Section Council in Boston this past April to other attorneys as a fact pattern. The names have been changed, as this is an ongoing case. First the above case was presented, followed by suggested trust language to prevent this nightmare case in the future.

This type of trust language was fine when it was written, but the law changed. A properly drafted irrevocable trust will still protect your assets if completed more than five years prior to a person entering a nursing home, but attorneys have to keep up with changes in the law and revise their trust language to best advise their clients. If your client has an existing trust, please check the language carefully.

Al Gordon is an attorney specializing in the areas of elder law, estate planning and disability law. He is also a member of the MBA's Probate Law Section Council.