This blog is written by Brian E. Barreira, an estate planning, probate and elder law attorney with offices at 118 Long Pond Road, Suite 206, Plymouth, Massachusetts, and 175 Derby Street, Unit 19, Hingham, Massachusetts. Brian has been named a Massachusetts Super Lawyer® in Boston Magazine in 2009-2015 and is listed in The Martindale-Hubbell Bar Register of Preeminent Lawyers in the fields of Elder Law and Trusts & Estates, Wills & Probate. Brian's biographical website can be found at SouthShoreElderLaw.com
Nothing on this blog should be considered to be legal advice or tax advice.
If you are a Massachusetts resident, a difference in a mere one penny in your net worth at death can result in $33,200.00 in Massachusetts estate taxes. The Massachusetts estate tax kicks in on a taxable estate of $1,000,000.00, and the estate tax on an estate of exactly $1,000,000.00 is $33,200.00. If instead the decedent’s taxable estate is one penny less, or $99,999.99, the tax is zero. Due to the thoughtless way the Massachusetts estate tax law was implemented, if a decedent’s Massachusetts taxable estate is between $1,000,000.00 and 1,033,000.00, the persons inheriting from that estate actually inherit less than if the taxable estate had been $99,999.99.
This strange estate tax result is based on a 2002 reaction (or thoughtless overreaction) by the Massachusetts state legislature to the so-called Bush tax cuts that occurred in 2001. A few years earlier, the previous Massachusetts estate tax had been repealed because a study had found that the existence of the Massachusetts estate tax caused a net loss in overall tax receipts due to older persons changing their domicile to avoid the estate tax.
When the latest version of the Massachusetts estate tax was implemented, the 2001 Bush tax cuts were phasing out the amount of the federal estate tax that had been shared with the states (known as the sponge tax or the “credit for state death taxes”), and the Massachusetts state legislature then passed legislation that allowed Massachusetts to continue receiving the same amount of estate tax revenue. Instead of coming from the federal government, the estate tax is now payable directly to the Commonwealth of Massachusetts by the decedent’s estate.
The odd implementation of the Massachusetts estate tax is highlighted by the manner in which the tax is calculated. In order to figure out the current Massachusetts estate tax, a 1999 Form 706, the Federal Estate Tax Return, must be filed. A blank copy of the 1999 Form 706, along with instructions, can be found on the Estate Tax page on the Massachusetts Department of Revenue’s website. Preparation of the 1999 Form 706 must be done to determine how much the Commonwealth of Massachusetts would have received if the federal estate tax exemption were now $1,000,000.00 and the federal tax law had not changed in 2001 to eliminate the credit for state death taxes. When the 1999 Form 706 is completed, the amount that the Commonwealth of Massachusetts receives as the Massachusetts estate tax is found on line 15, the credit for state death taxes.
Some simple last-minute moves can often be made by Massachusetts residents (and non-residents) to minimize or avoid paying the Massachusetts estate tax on amounts over $999,999.99. Where the federal estate and gift tax exemption is now $5,450,000.00 in 2016, it may be time for the Massachusetts state legislature to take a moment to think the Massachusetts estate tax through so that it becomes more fair or sensible.
When Can a “Payment” of a Home Be Made from an Irrevocable Trust in Violation of Federal Medicaid Trust Law?
Lawyers currently practicing elder law in Massachusetts will tell you that just about any trust will be challenged by the Office of Medicaid in a MassHealth application. (See IrrevocableTrust.info for over 100 examples of trusts that went to fair hearings in the past 4 years.) Due to an appalling lack of trust law knowledge or ethics, some lawyers representing the Office of Medicaid seem to be willing to say and write just about anything if it means that a MassHealth application involving a trust could be denied. The bottom line inquiry, however, is supposed to be whether a payment can be made directly to the settlor of the trust.
The very headings of the key MassHealth regulations at 130 CMR 520.023(C) state “Portion Payable” and “Portion Not Payable,” yet the Office of Medicaid never brings that point up in its relentless attack against all trusts. These headings make two points: first, that it is possible for only a portion of a trust to be countable, and second, and more importantly, that something must be payable from the trust for it to be countable. The Office of Medicaid has put many trusts through contortions of logic to be able to claim they were countable, but now the Office of Medicaid is simply taking the position that a MassHealth applicant’s former home in any trust is automatically a countable asset, no matter what the trust says.
A mere right to use property in a trust does not make that property payable or distributable out of the trust to the person with the right of or opportunity for usage. Similarly, a Trustee may have the authority to use principal to generate income, but that authority does not in and of itself become expanded to usage of the principal. Without concern for law or logic, but concerned only about attacking any trust it sees, the Office of Medicaid has written in many recent MassHealth fair hearings that a settlor’s right to use and occupy the settlor’s former home held in trust makes that home a countable asset, even if it is not payable or distributable out of trust to the applicant. The rationale for this new position is 130 CMR 520.023(C)(1)(d), which states: “The home or former home of a nursing-facility resident or spouse held in an irrevocable trust that is available according to the terms of the trust is a countable asset.”
Before January 1, 2014, the Office of Medicaid had an official, published position on what the term “available” meant in its MassHealth trust regulations, and under the “Definition of Terms” in 130 CMR 515.001, the term “available” was defined as “a resource that is countable under Title XIX of the Social Security Act.” It was then clear that availability was determined by countability, and not the other way around. The fact that the word “available” is now undefined allows lawyers at the Office of Medicaid to believe they somehow can now ethically take a contrary position about what the word means.
Nowhere in federal Medicaid or SSI trust law is a trust evaluated based upon what it owns, yet it appears to be the new position of the Office of Medicaid that the 1993 Medicaid trust law states that assets in trust are countable depending upon their nature, that the former home of a MassHealth applicant, who has the right to use that home held in trust, or who does not have the legal right but simply does so, is a countable asset in a MassHealth application. What the Office of Medicaid ignores in its “analysis” is why, if the trustee had sold that home prior to the applicant’s applying for benefits, those sale proceeds might not be countable, depending on the terms of the trust.
The latest argument from the Office of Medicaid involves the State Medicaid Manual, HCFA Transmittal 64, s. 3259.1(A)(8), which states, in part: “A payment may include actual cash, as well as noncash or property disbursements, such as the right to use and occupy real property.” The sentence preceding that one, however, provides the context: “[A] payment from a trust is any disbursal from the corpus of the trust or from income generated by the trust which benefits the party receiving it.” Nowhere does HCFA 64 suggest that a right to income or right to use and occupy real estate is tantamount to access to principal, but somehow the Office of Medicaid tries to mislead hearing officers and judges to draw that erroneous conclusion, despite the fact that payment is required even under its own regulation at 130 CMR 520.023(C)(1)(a), which states: “Any portion of the principal or income from the principal (such as interest) of an irrevocable trust that could be paid under any circumstances to or for the benefit of the individual is a countable asset.” (emphasis added)
Even though the Office of Medicaid continues to make this same silly argument in case after case, some fair hearing officers are understanding the legal issue and displaying some independence by ruling against the Office of Medicaid. In Appeal 1402188, decided on November 10, 2014, in approving an irrevocable trust, Hearing Officer Christopher S. Taffe wrote on page 15:
“I conclude that under the terms of the Trust, there is no evidence that there is any “portion” of the Realty Trust which is “payable” to the Appellant; I will note that while the regulation in 130 CMR 520.023(C)(1)(d) is somewhat vague as to what “available” means in terms of the former home, the fact that the entire subsection in the regulation at 130 CMR 520.023(C)(1) is titled “Portion Payable” suggests that, for there to be a finding of countability and availability, there must be some circumstances in the trust language which gives an LTC applicant some colorable claim and ability to receive some form of payment from the resource in the trust corpus. This is also consistent with 42 U.S.C. §1396p(d)(3)(B)(ii), quoted by MassHealth in its memorandum, which uses the phrase “…payment from the trust …” to describe the “any circumstances” test.”
Further, in Appeal 1404746, decided March 30, 2015, Hearing Officer Thomas J. Goode on pages 16-17 ruled that the home or former home of the applicant in a trust should not be treated differently than other assets, and ruled that the home and other assets in the trust were not countable:
“I disagree with the MassHealth position that because appellant’s former residence is “available” to the spouse under the terms of the Trust, it is therefore countable under 42 U.S.C. 1396p (d)(2)(A)(B) and (C) and under 130 CMR 520.023(C)(l)(d). In the case of an irrevocable trust, 42 U.S.C. 1396p(d)(3)(B) imposes the “any circumstances” test under which either income or principal can be paid to the applicant, and considers available the amount that could be paid to the individual from income or from the corpus of the trust. … [R]egulation 130 CMR 520.023(C)(l)(d), read within the context of the “any circumstances” test at 42 U.S.C.l396p(d)(3)(B), requires that Trust property, whether the former home or not, is “available” such that it would result in Trust principal being paid to the applicant. … There is no preclusion under either federal law or MassHealth regulations restricting an applicant from retaining a life estate interest in the former residence. Therefore, it would be inconsistent to determine that the former home held in Trust is automatically countable under 520.023(C)(l)(d) without a finding that, according to the terms of the Trust, the Trustee can sell the property, and pay the proceeds to the individual to be used for the benefit of the applicant.”
A simple, straightforward reading of the federal Medicaid and SSI trust law shows that available means payable and countable, and that something that is not payable out of the trust to the MassHealth applicant is unavailable and noncountable. The Office of Medicaid’s illogical new claims about the regulation at 130 CMR 520.023(C)(1)(d) lack any legislative underpinning, and display a lack of knowledge of federal Medicaid trust law, or perhaps a simple choice on the part of its lawyers to distort everything possible, even beyond reason.
It is an open question as to whether the new ethical rules governing Massachusetts lawyers will finally reign in lawyers at the Office of Medicaid, who often adopt an ends-justifies-the-means strategy in attacking trusts. Revised Rule 3.3 of the Massachusetts Rules of Professional Conduct, effective July 1, 2015, has strengthened a lawyer’s duty of candor in presenting evidence and legal argument to a court or other tribunal, including a fair hearing, and a lawyer is prohibited from knowingly making any false statement to a tribunal, not just material false statements. Further, comment 13 to Rule 3.3 clarifies that a lawyer’s obligation to rectify false statements to the tribunal extends until a final judgment in a proceeding has been affirmed or the time for appeal has expired.
Should Alternatives to Irrevocable Trusts Be Considered for Massachusetts Medicaid Planning Purposes?
In 2014, I established the irrevocabletrust.info website to disclose recent MassHealth fair hearing decisions involving irrevocable trusts, as well as to publicize the memoranda of the Office of Medicaid filed at fair hearings, which always contain reckless misrepresentations of law. (Attempts to receive permission to publish sample fair hearing memoranda at Massachusetts Continuing Legal Education programs have been met with refusal, so the intentional hiding of the work of Katy Schelong and her ilk at the Executive Office of Health and Human Services underscores the sneaky intentions behind their attacks against trusts.) It appears that just about any trust involved in a MassHealth application can result in the need for a fair hearing appeal, with the outcome often being based on which hearing officer is randomly assigned to the appeal by the Board of Hearings. Thus, using an irrevocable trust when it is not needed can be asking for trouble, no matter how well-drafted the trust is.
When in pre-internet days my article entitled “An Irrevocable Grantor Trust Can Assure Eligibility for Medicaid” was published in the March/April 1989 issue of Estate Planning, it was the first major article published nationally on how to establish an irrevocable trust that worked for both Medicaid and capital gains tax purposes. Included in the article was what was then considered a novel approach of including a special (or limited, non-general) power of appointment in the irrevocable trust. I was then invited to speak about trust planning at the Second Annual Elder Law Symposium, and one of the first Fellows of the National Academy of Elder Law Attorneys roasted me for the very idea of using a special power of appointment; it was an affront to her sense of the goals of governmental benefit programs, and she said it would never work.
Despite that lawyer’s 1990 beliefs, the inclusion of a special power of appointment in an irrevocable trust has passed muster for many years throughout the United States, but the same gut reaction as the NAELA Fellow’s to a special power of appointment may have occurred in the leading Massachusetts case of Doherty vs. Director of the Office of Medicaid, 74 Mass. App. Ct. 439 (2009). As I have been told, the Massachusetts Appeals Court had on its own motion inquired into the concept of the power of appointment. The Doherty opinion is somewhat vague about what was wrong about that trust, and in its next-to-last paragraph there seems to be a missing transitional point in its decision against the trust. It seems that the Court may have had a problem with the special power of appointment, but didn’t know quite what, if anything, to write about it.
Egged on by reckless misrepresentations of law by the Office of Medicaid, some of the hearing officers ruling on irrevocable trusts at MassHealth fair hearing appeals seem to conclude that control over the trust is the equivalent of owning the assets, and special powers of appointment are often mentioned in those decisions. Thus, if the lawyers representing the Office of Medicaid cannot be trusted to present and enforce the federal Medicaid trust law honestly, and if the lawyers hearing the appeals at the Board of Hearings are easily misled due to a lack of proper training, I suggest that Massachusetts elder law attorneys hired to perform estate planning for elders should be considering alternatives to irrevocable trusts wherever feasible. There is no such thing as a one-size-fits-all solution, where clients have different goals and varying needs, but joint tenancies or deeds with reserved life estates and/or special powers of appointment can often give clients who own real estate a practical estate planning solution without the later risk involved in defending irrevocable trusts.
I am not suggesting that irrevocable trusts are not valid estate planning tools, or that the federal Medicaid trust law, which has not changed since 1993, disallows them. What I am suggesting is that the unethical lawyering taking place at the Office of Medicaid, as well as the questionable or nonexistent training being provided to hearing officers by the Director of the Board of Hearings (who reports directly to the Director of the Office of Medicaid, who is allowing these trust attacks to continue), should be disclosed to clients and, as a result, alternatives to irrevocable trusts be considered.
The Internal Revenue Service has recently announced that in 2016 the federal estate tax exemption will rise from $5,430,000.00 to $5,450,000.00 per person. (Under current law, this figure is adjusted annually for inflation.) Married couples can get the benefit of two exemptions, so in 2016 the total federal estate tax exemption per couple can be $10,900,000.00. The top estate tax rate on amounts above the exemption is 40%.
Under a fairly new concept known as portability, the surviving spouse in some situations can use the unused exemption of the first spouse to die. Portability requires, in part, the timely filing of a federal estate tax return for the first spouse to die. Unfortunately, the surviving spouse cannot use the deceased spouse’s unused exemption after a remarriage.
Few estates are expected to owe any federal estate tax in 2016, so the federal estate tax is no longer the biggest concern for many wealthy U.S. citizens who want to avoid taxes on wealth they leave behind to their heirs. The focus for many wealthy U.S. citizens has changed to minimizing capital gains taxes.
Although some state estate tax filing figures throughout the nation are being increased, there is no change planned for Massachusetts residents. The Massachusetts estate tax still begins at a taxable estate of $1,000,000.00, with a minimum tax of $33,200.00. Oddly enough, the tax is largely calculated through the preparation of a 1999 Federal Estate Tax Return, a copy of which is on the Commonwealth’s website. Persons who are not Massachusetts residents but own real estate in Massachusetts are affected by this tax, as well as an unrecorded Massachusetts estate tax lien that arises by operation of law.
The Internal Revenue Service has also announced that in 2016 the annual gift exclusion will remain $14,000.00 per recipient. The provision sets the highest amount that an individual can give on an unreportable tax-free basis, without affecting the gift-giver’s federal estate tax exemption, to any person who isn’t the gift-giver’s spouse, or to an unlimited number of persons.
Transfers or gifts between spouses are usually tax-free, but not always. Whether the gift is tax-free is based on whether the spouse who is receiving the gift is a U.S. citizen. A spouse who is a U.S. citizen can receive unlimited gifts, but a spouse who is not a U.S. citizen will be limited to receiving $148,000.00 in 2016.
Gifts made in excess of the $14,000.00 or $148,000.00 rules require the filing of a federal gift tax return, and make use of part or all of the gift-giver’s federal estate tax exemption. There is no gift tax in Massachusetts, so there is no filing requirement regarding gifts with any Massachusetts governmental entity.
Does the Director of the Board of Hearings at the Office of Medicaid Realize (or Even Care) that the MassHealth Subpoena Regulation is Legally Invalid?
Under a MassHealth regulation governing fair hearings, 130 CMR 610.052 (B), a MassHealth appellant has the right to a subpoena, either requiring the attendance and testimony of a witness or the production of any evidence (including books, records, correspondence, or documents) relating to any matter in question at the hearing. According to this MassHealth Board of Hearings (“BOH”) regulation: “Any party may submit to BOH a written request for the issuance of such subpoena. If, in its discretion and in accordance with 130 CMR 610.065(B), BOH allows such request, a subpoena will be issued within three business days of receipt of such request.”
The problem with that regulation, which was presumably reviewed and approved by lawyers representing the Office of Medicaid, is that it overrules Massachusetts law instead of interpreting it. A regulation is supposed to be an interpretation of law wherever there is ambiguity or room for agency discretion. The underlying Massachusetts law, Massachusetts General Laws, Chapter 30A, Section 12, from which this regulation is derived does not give the BOH even a hint of authority to decide whether a subpoena should be issued. Rather, M.G.L. c. 30A, s.12 provides that “[a]ny party to an adjudicatory proceeding shall be entitled as of right to the issue of subpoenas in the name of the agency conducting the proceeding. The party … may make written application to the agency, which shall forthwith issue the subpoenas requested.” (emphasis added) The regulation at 130 CMR 610.052 is derived from M.G.L. c. 30A, s.12 and cannot be interpreted to deprive the appellant of the right to a subpoena under Massachusetts law.
It is completely beyond my belief that all of the many lawyers at the Office of Medicaid and the BOH do not understand or care that they are regularly violating this subpoena law, but the ultimate blame has to be placed on the Director of the BOH, Kim Larkin, who is a lawyer and oversees the fair hearing process. By law, under Massachusetts General Laws, Chapter 118E, Section 48, the BOH is supposed to be independent of the rest of the agency, but good luck trying to subpoena information from the other part of the agency.
I have had direct experience with the BOH in its consistent refusal to issue subpoenas. When challenging the Office of Medicaid’s failure in 2000-2001 to calculate the average daily cost of nursing home care (a critical figure in the imposition of a MassHealth ineligibility period due to disqualifying transfers of assets), I requested subpoenas regarding the process used to calculate the figure and the underlying data. The Director of the BOH, Kim Larkin, refused to issue any subpoena at that time. In 2014, in Appeal 1411682, where a trust amendment was being treated as a disqualifying transfer of assets, I wrote to the hearing officer for a subpoena to be issued to the Director of the Office of Medicaid (or her designee) for the underlying data used to calculate the average daily rate being posted. The subpoena was not issued by the hearing officer based on the flimsy excuse that it presumed the MassHealth representative would not be able to provide the requested information at the hearing, and that the Office of Medicaid was now put on notice that the issue could arise at the hearing; not so coincidentally, the MassHealth representatives at the hearing did not have the subpoenaed information, and the hearing officer did nothing at all about it.
In another 2014 appeal (Appeal 1409671), I requested a subpoena to the Director of the Office of Medicaid (or her designee) regarding similar trusts that had received approvals, and it was denied in large part because the hearing officer claimed that the information requested was irrelevant. The next day, at the fair hearing, the hearing officer acknowledged that the issue was a valid one to be pursued by the appellant, but then his excuse for refusing to issue the subpoena was that I had had a notary public issue my own subpoena after I had received his refusal to do so; thus, the hearing officer stated he did not have to do so because there already was one in existence. He then gave me 2 weeks to petition the Superior Court for an order requiring compliance with the terms of the subpoena that he himself could have simply issued after acknowledging that the issue being pursued was valid. It seems that the BOH hearing officers always have an excuse for not issuing a subpoena to the Director of the Office of Medicaid, and it therefore appears that the claimed independence of the BOH, which is a part of the Office of Medicaid, is lip service only.
When a subpoenae is directly issued to the Director of the Office of Medicaid (or her designee) by a notary public, as is permitted under M.G.L. c. 30A, s.12, lawyers representing the Office of Medicaid usually send back a form letter which states that a subpoena is only valid if issued by the BOH hearing officer, and that the Office of Medicaid will not comply with the subpoena. Thus, it seems that these lawyers representing the Office of Medicaid either lack a basic understanding of how regulations cannot override laws, or are advising their client not to follow the law, which would seem to be unethical lawyering. It may also be unethical conduct for a hearing officer (who is a lawyer) not to issue a subpoena, where black letter law states that it must be done.
Under 130 C.M.R. 610.065(A)(4), the Board of Hearings has the duty “to ensure that all parties have a full opportunity to present their claims orally or in writing and to secure witnesses and evidence to establish their claims,” but it seems clear that the Office of Medicaid does not want its hearing officers to be required to issue subpoenas, and the hearing officers and the Director of BOH seem to bend over backwards to find excuses not to allow appellants to attain their right to a subpoena under M.G.L. c. 30A, s.12. Unfortunately for the system of justice, the Director of the BOH does not seem to understand or care about these fundamental issues of due process and administrative law.
A Rebuttal to the Reckless Misrepresentation of Federal Medicaid Trust Law by the Office of Medicaid in Massachusetts
The Office of Medicaid now appears to take the position that all assets held in any Irrevocable Trust should be counted for MassHealth purposes, despite having regulations to the contrary. The Office of Medicaid has developed a boilerplate written document that it adapts slightly to the terms of each trust it is attacking, and files this document at fair hearings. The document has not been vetted or published in any official manner, has been withheld from public view, and may be best described as an essay, so it will be referred to herein as the “MassHealth Essay.”
The continual usage of the MassHealth Essay makes it akin to an illegal, unpublished regulation. Among the more inventive claims in the MassHealth Essay are that the 1993 federal Medicaid trust law creates a presumption that all self-settled trusts are countable, that the intention of a settlor to have a trust be income-only is prohibited because the purposes for which a trust is established must be disregarded, that any trust can purchase an annuity and cause the principal to be paid to the income beneficiary, and that if a home is available for use by the settlor then it is per se a countable asset.
Copies of the MassHealth Essay as it has evolved can be found online at IrrevocableTrust.info, along with dozens of fair hearing decisions that have accepted or rejected the arguments of the Office of Medicaid.
Congress changed federal Medicaid trust law in 1985 and repaired it in 1993, but there have been no changes in this federal law since 1993. What the Office of Medicaid has done is distort the case of Doherty v. Commissioner, 74 Mass. App. Ct. 439 (2009), which was about a flawed trust, and apply its distortions to all trusts. Where the basic arguments in the earlier versions of the MassHealth Essay were not given in advance to appellants or distributed to the elder law bar, the tactics of the Office of Medicaid led to some unwarranted fair hearing denials. Even though M.G.L. c. 118E, s. 48 provides that the Director of the Board of Hearings “shall be responsible …for the training of referees,” it is unknown to the elder law bar whether such training has occurred regarding the details of federal Medicaid trust law, so hearing officers at the Board of Hearings may have been and may still be susceptible to being misled by the MassHealth Essay.
Now that the elder law bar has seen several copies of the MassHealth Essay, it is clear why the Office of Medicaid has shielded the MassHealth Essay from public release. The Office of Medicaid has claimed in the MassHealth Essay that many irrevocable trusts were revocable, has continually cited a probate law that had been repealed many years earlier, has incorrectly cited federal Medicaid trust law, and has utilized many quotes from cases out of context. Neither the details of the trust nor its funding details nor the actual case are provided to back up the applicability of many of the quotes in the MassHealth Essay.
The duty of candor to the tribunal applies to lawyers representing administrative agencies. It is questionable as to whether the past and ongoing usage of the MassHealth Essay constitutes ethical conduct by the lawyers representing the Office of Medicaid.
History of Medicaid Trust Law Reflects That Debtor-Creditor Analysis Is the Proper Standard of Review for Self-Settled Irrevocable Trusts
Before 1985, a settlor could place the settlor’s assets in trust for the settlor and grant the trustee complete discretion to distribute principal back to the settlor. The assets held in that type of trust were not counted as assets of the Medicaid applicant before 1985. “As we have stated, prior to 1986 some irrevocable trusts simply allowed complete discretion in the trustee without any further specification.” Cohen v. Comm’r of Div. of Med. Assistance, 423 Mass. 399, 409 (1996). Such a trust, however, would not have been effective against a creditor under state debtor-creditor laws. To eliminate this loophole in the law, Congress changed federal Medicaid law to allow states to implement their existing debtor-creditor laws against that type of trust. Many of the quotes erroneously relied upon by the Office of Medicaid in the MassHealth Essay were discussing these types of trusts, yet the Office of Medicaid chooses not to explain the context of the quotes.
In the Cohen case, Justice Charles Fried of the Supreme Judicial Court concluded that Congress was effectively implementing state debtor-creditor laws when it enacted Medicaid trust laws: “We are confirmed in this reading by something akin to legislative history: a consideration of the source from which the legislative language appears to have been taken. … Restatement (Second) of Trusts s. 156 (1959) provides: “Where the Settlor is a Beneficiary . . . (2) Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.” The plaintiffs suggest that this provision was a likely model for the Congressional enactment, and a comparison of the purpose and the language of the provision confirms their suggestion. Section 156 of the Restatement deals with a device, like the MQT, concocted for the purpose of having your cake and eating it too: the self-settled, spendthrift trust. Under such a trust, a grantor puts his assets in a trust of which he is the beneficiary, giving his trustee discretion to pay out monies to gratify his needs but limiting that discretion so that the trustee may not pay the grantor’s debts. Thus, the grantor hopes to put the trust assets beyond the reach of his or her creditors. Like the MQT statute, s. 156 defeats this unappetizing maneuver by providing that, even if those assets are sought to be shielded by the discretion of a trustee, or if the trust simply declares assets unavailable to creditors, the full amount of the monies that the trustee could in his or her discretion “under the terms of the trust” pay to the grantor, is the amount available to the grantor and thus to his or her creditors. Not only the courts of this State, but those of many other jurisdictions have long followed this Restatement principle. See Ware v. Gulda, 331 Mass. 68 , 70 (1954); Merchants Nat’l Bank v. Morrissey, 329 Mass. 601 , 605 (1953). See also Scott, Trusts s. 156 n.1 (3d ed. 1967 & Supp. 1985) (compiling cases).” Cohen at 413-415 (emphasis added).
What the Cohen holding means is that, for trust interpretation purposes, the MassHealth program stands in the same shoes as a creditor of the settlor. Under Ware, a creditor could sue a self-settled trust and reach the maximum amount capable of distribution to the settlor, and under Cohen, the maximum amount capable of distribution to the settlor was treated as an available asset. If a creditor could successfully sue the Irrevocable Trust for a debt of the settlor and reach the principal, then those are the circumstances under which the principal of the Irrevocable Trust would be treated as a countable asset under federal Medicaid law, and only to the extent that the creditor could do so.
Nursing homes are being placed in the middle by the recklessness of the Office of Medicaid on trust issues. If a MassHealth application is denied due to the existence of the Irrevocable Trust, and if the nursing home could reach the Irrevocable Trust as a creditor of the denied MassHealth applicant under Massachusetts debtor-creditor laws, then the nursing home could eventually be made whole by suing the denied MassHealth applicant and the Irrevocable Trust. Where, however, a creditor of the Appellant cannot reach the principal of the Irrevocable Trust and the trustee cannot be forced to pay the nursing home, then the nursing home would be left with no payment source if the MassHealth application and appeal are denied. “If the settlor-beneficiary creates a remainder interest in another person, then the settlor-beneficiary’s creditors will not be able to reach the remainder interest if the trustee cannot reach the corpus for the settlor-beneficiary’s benefit.” In re Shurley, 115 F.3d 333 (5th Cir. 1997), citing G. Bogert & G. Bogert, Trusts and Trustees (2d rev. ed. 1992), § 223, at 453. “Where the settlor retains only a limited interest in a trust, the portion thereof not retained is afforded some protection even though it is self-settled. The settlor’s creditors can reach trust assets to the maximum extent that the trustee could distribute or apply such assets for the settlor-beneficiary’s benefit.” Peter Spero, Asset Protection: Legal Planning, Strategies and Forms, 6.08 (Warren Gorham & Lamont, 2007), citing 2 A. Scott & W. Fratcher, The Law of Trusts (4th ed. 1987), §156.2, at 175.
The 1993 Federal Medicaid Trust Law Repaired Gaps in the 1985 Law
States were not specifically required to implement the 1985 federal Medicaid trust law, and the 1993 law required them to do so. “In enacting the trust provisions of OBRA 1993, Congress provided a comprehensive system for dealing with the relationship between trusts and Medicaid eligibility. After limited success with the Medicaid Qualifying Trusts provisions enacted in 1986, Congress made a deliberate choice to expand the federal role in defining trusts and their effect on Medicaid eligibility. Evidence of this can be found throughout the Medicaid statute. For example, the current text of 42 U.S.C. § 1396a(a)(18) requires States to comply with “section 1396p of this title with respect to . . . treatment of certain trusts[.]” Before OBRA 1993, the provision instructed States to “comply with the provisions of section 1396p of this title with respect to liens, adjustments and recoveries of medical assistance correctly paid, and transfers of assets[.]” 42 U.S.C. § 1396a(a)(18) (1992). It did not mention compliance with 1396p.” Lewis v. Alexander, 685 F.3d 325, 343 (3d Cir. 2012)
As explained in detail by the Supreme Judicial Court in the Cohen case, trusts where principal was overtly available for distribution, yet had various types of conditional limitations on trustee discretion, were not clearly covered in the 1985 law. The Cohen court explained that the 1993 law eliminated a settlor’s ability to utilize such conditional limitations in trusts, as Congress expanded the definitions to pull those trusts into the Medicaid application process as countable assets. In discussing the Kokoska part of the case, the Cohen court stated that, apart from the special needs trust exceptions, the 1993 law was simply a correction of the gaps left in the 1985 law. The Supreme Judicial Court concluded that the 1993 changes in federal Medicaid trust law repaired the gaps in the 1985 law and “resolves in favor of the Commonwealth all possibility of argument the issue presented in these cases.” Cohen at 406.
Before 1993, a Medicaid applicant could place the principal residence into a revocable trust and preserve it, because the transfer was not deemed to be disqualifying, and the home was still deemed noncountable. The 1993 law also targeted this problem by treating a home in a revocable trust as a countable asset.
United States Court of Appeals Has Held in Case of Lewis v. Alexander that Federal Medicaid Law Does Not Direct that State Trust Laws Be Ignored
The Office of Medicaid claims in the MassHealth Essay that all Massachusetts trust laws should be ignored, but the United States Court of Appeals for the Third Circuit has already examined Congressional intent in the context of Medicaid trust laws and concluded otherwise. “Congress rigorously dictates what assets shall count and what assets shall not count toward Medicaid eligibility. State law obviously plays a role in determining ownership, property rights, and similar matters.” Lewis v. Alexander, 685 F.3d 325, 334 (3d Cir. 2012). “Trusts are, of course, required to abide by a State’s general law of trusts.” Lewis at 335, footnote 15. “[T]here is no reason to believe [Congress] abrogated States’ general laws of trusts. … After all, Congress did not pass a federal body of trust law, estate law, or property law when enacting Medicaid. It relied and continues to rely on state laws governing such issues.” Lewis at 343.
There Is No Presumption in Federal Medicaid Trust Law About the Countability of Trusts
There is no presumption in federal Medicaid trust law about all trusts being countable assets, and nothing resembling such a point was made by the Office of Medicaid in the four major trust cases in which extensive briefs of law were filed at the appellate court level. No such argument was made in Cohen, Doherty, Lebow v. Comm’r of Div. of Med. Assistance, 433 Mass. 171 (2001) or Guerriero v. Commissioner of the Division of Medical Assistance, 433 Mass. 628 (2001), so the claim in the MassHealth Essay about there being a presumption that all trusts are countable assets is a new position that is not entitled to judicial deference.
The Office of Medicaid makes a reckless misrepresentation of law when it claims in the MassHealth Essay that all state trust law is to be ignored in the determination of eligibility for Medicaid benefits for long term care. The federal Medicaid law at 42 USC 1396p(d)(2)(C) specifies only four aspects of state trust law that may be ignored in determining eligibility:
“(C) …this subsection shall apply without regard to—
(i) the purposes for which a trust is established,
(ii) whether the trustees have or exercise any discretion under the trust,
(iii) any restrictions on when or whether distributions may be made from the trust, or
(iv) any restrictions on the use of distributions from the trust.”
The Office of Medicaid misleads the hearing officer at a fair hearing by emphasizing the phrase “any circumstances” in the MassHealth Essay, when in fact these four circumstances in 42 USC 1396p(d)(2)(C) are the only circumstances addressed by the federal Medicaid trust law. The trust must, as a precondition of countability, allow distributions to or for the settlor. Having the principal of the trust initially available, but with an attempt to attach protective strings thereafter, is what was described in Cohen as “concocted for the purpose of having your cake and eating it too.”
The Office of Medicaid makes the specious claim in the MassHealth Essay that the settlor’s intentions in establishing an income-only trust should be ignored because 42 U.S.C. §1396p(d)(2)(C)(i) states that the purpose of the trust is to be ignored. Under that reasoning, the very intention of income limitation would presumably be the legislatively prohibited purpose, despite the fact that the rest of the federal Medicaid trust law goes through the effort to distinguish between principal and income.
Since 1994, the State Medicaid Manual Has Provided Binding Guidance on What “Any Circumstances” Means under Federal Medicaid Trust Law
The State Medicaid Manual was described by the Supreme Judicial Court in footnote 10 of Cohen as “the Federal manual that provides interpretive guidance to the States.” Issued by the Centers for Medicare and Medicaid Services, it is binding on the States by contract, as the Foreword to the State Medicaid Manual, at B.1., states: “Contents.– The manual provides instructions, regulatory citations, and information for implementing provisions of Title XIX of the Social Security Act (the Act). Instructions are official interpretations of the law and regulations, and, as such, are binding on Medicaid State agencies.”
The portion of the State Medicaid Manual known as HCFA Transmittal 64 was issued in 1994 to provide guidance on the 1993 federal Medicaid law changes. The substance of the federal Medicaid trust law has not changed since then.
The “any circumstances” test in federal Medicaid trust law is limited to four aspects of state trust law, and the State Medicaid Manual at 3259.6 E. has long provided guidance to all states in describing the circumstances under which payments can or cannot be made: “In determining whether payments can or cannot be made from a trust to or for an individual, take into account any restrictions on payments, such as use restrictions, exculpatory clauses, or limits on trustee discretion that may be included in the trust. For example, if an irrevocable trust provides that the trustee can disburse only $1,000 to or for the individual out of a $20,000 trust, only the $1,000 is treated as a payment that could be made under the rules in subsection B. The remaining $19,000 is treated as an amount which cannot, under any circumstances, be paid to or for the benefit of the individual. On the other hand, if a trust contains $50,000 that the trustee can pay to the grantor only in the event that the grantor needs, for example, a heart transplant, this full amount is considered as payment that could be made under some circumstances, even though the likelihood of payment is remote. Similarly, if a payment cannot be made until some point in the distant future, it is still payment that can be made under some circumstances.”
The Office of Medicaid Must Construe Federal Medicaid Law to Favor Applicants, and Cannot Be More Restrictive Than SSI
The MassHealth fact-finding process and trust law interpretation in the MassHealth application and appeal processes, as expressed in the MassHealth Essay, is more restrictive than Supplemental Security Income (SSI) Program procedures and federal law interpretation in the Program Operations Manual System (“POMS”) of the Social Security Administration. The Office of Medicaid cannot utilize a methodology that is more restrictive than that used by SSI. See Lewis v. Alexander, 685 F.3d 325 (3d Cir. 2012) and 42 U.S.C. § 1396a(a)(10)(C)(i)(III). A methodology is “considered to be ‘no more restrictive’ if, using the methodology, additional individuals may be eligible for medical assistance and no individuals who are otherwise eligible are made ineligible for such assistance.” 42 U.S.C. §1396a(r)(2)(B).
The arguments made by the Office of Medicaid regarding “any circumstances” are invalid because they are more restrictive than the directives in the POMS. Section SI 01120.201D – Treatment of Trusts of the POMS reads, in relevant part:
“b. Circumstance under which payment can or cannot be made
In determining whether payments can or cannot be made from a trust to or for the benefit of an individual (SI 01120.201F.1.), take into consideration any restrictions on payments. Restrictions may include use restrictions, exculpatory clauses, or limits on the trustee’s discretion included in the trust. However, if a payment can be made to or for the benefit of the individual under any circumstance, no matter how unlikely or distant in the future, the general rule in SI 01120.201D.2.a. in this section applies (i.e., the portion of the trust that is attributable to the individual is a resource, provided no exception from SI 01120.203 applies).
An irrevocable trust provides that the trustee can disburse $2,000 to, or for the benefit of, the individual out of a $20,000 trust. Only $2,000 is considered to be a resource under SI 01120.201D.2.a. in this section. The other $18,000 is considered to be an amount which cannot, under any circumstances, be paid to the individual and may be subject to the transfer of resources rule in SI 01120.201E in this section and SI 01150.100.
If a trust contains $50,000 that the trustee can pay to the beneficiary only in the event that he or she needs a heart transplant or on his or her 100th birthday, the entire $50,000 is considered to be a payment which could be made to the individual under some circumstance and is a resource.
An individual establishes an irrevocable trust with $10,000 of his assets. His parents contribute another $10,000 to the trust. The trust only permits distributions to, or for the benefit of, the individual from the portion of the trust contributed by his parents. The trust is not subject to the rules of this section. The portion of the trust contributed by the individual is subject to evaluation under the transfer of resources rules in SI 01150.100 (see also SI 01120.201E in this section). The portion of the trust contributed by his parents is subject to evaluation under SI 01120.200.”
The MassHealth or Medicaid fact-finding process and trust law interpretation cannot be more restrictive than that of SSI, but can be more liberal, in part due to the availability of waiver programs. Thus, SSI eligibility workers are instructed in the POMS not to make Medicaid determinations, but such instructions due not affect the overriding federal law that the Medicaid fact-finding process and trust law interpretation cannot be more restrictive than SSI procedures.
The POMS contains extensive sections regarding trusts that are meant to give guidance on how trusts should be treated for SSI (and, concomitantly, Medicaid or MassHealth) purposes, and the Office of Medicaid is legally bound by it. The POMS contains no provision that self-settled irrevocable trusts are presumed to be countable. The POMS contains no provision that directs or even hints that state trust law be ignored. The POMS contains no provision that any amount of reserved control results in an income-only irrevocable trust being treated as available to the applicant. The POMS contains no provision that a termination provision whereby a trustee can distribute assets to the remainderpersons results in an income-only irrevocable trust being treated as available to the applicant. The POMS contains no provision that the possible investment by the trustee of an income-only irrevocable trust in annuities, life insurance or other investments renders the principal available to the settlor. The POMS contains no provision that a life estate in an irrevocable trust or mere usage of a home renders the principal of the trust to be deemed available to the settlor. The POMS contains no provision that the reservation of a limited power of appointment or special power of appointment in an income-only irrevocable trust renders the principal of the trust to be deemed available to the settlor. The POMS contains no provision that the reservation of a power of substitution of assets in an income-only irrevocable trust renders the principal of the trust to be deemed available to the settlor. In short, the POMS contains no provision that directs or even hints that anything other than the right of a settlor or the settlor’s spouse to withdraw principal without consideration or the power of a trustee to distribute principal to the settlor or the settlor’s spouse matters in the review of an income-only irrevocable trust.
In Determining Whether the Principal of an Irrevocable Trust Is Countable for MassHealth Purposes, Control by the Settlor Over the Trust Is Not a Relevant Issue
In determining whether the principal of an Irrevocable Trust can be withdrawn by the settlor or given to the settlor by the trustee, or is in any way available to the settlor for Medicaid, MassHealth or SSI purposes, the fact that the settlor may reserve some rights or powers over the irrevocable trust is not a relevant factor. If Congress had determined that any facet of a settlor’s control over an irrevocable trust should affect its countability, it would have specifically stated so in federal Medicaid and SSI trust laws, yet Congress chose not to do so.
Congress has long known that settlors can reserve different aspects of control over irrevocable trusts. When passing the Internal Revenue Code of 1954, many years before passing the current Medicaid trust laws in 1985 and 1993, Congress had already dealt with control by settlors in the trust income taxation area with the so-called grantor trust rules. The provisions in Internal Revenue Code sections 671-679, the grantor trust rules, are very detailed, and indicate that Congress is aware that there are many varieties of trust provisions where settlors can reserve varying degrees of control over irrevocable trusts.
In proper statutory interpretation of federal laws, Congress is presumed to know about other laws it has passed. If in the Medicaid context Congress had been concerned about trust control issues and wanted state Medicaid agencies to make a complicated review of irrevocable trusts, Congress could have simply pointed to the grantor trust rules. When passing federal Medicaid trust laws, Congress did not indicate concern for control issues by making any type of cross-reference to the grantor trust rules, or inserting provisions directly in federal Medicaid trust law prohibiting any degree of control by the settlor. When passing federal Medicaid trust laws, Congress simply allowed states to implement their own debtor-creditor laws.
Usage of a Home in an Irrevocable Trust Does Not Cause the Principal of the Trust to Be Countable
The Office of Medicaid often makes the argument that a life estate in a trust provides access to the principal of an Irrevocable Trust, and that mere usage of the home on a rent-free basis provides access to the principal of the Irrevocable Trust. The Office of Medicaid makes that statement in a conclusory fashion, without explaining how that could possibly be.
Residing in a home owned by an Irrevocable Trust does not mean the principal was “available” to the Appellant as the term is used in 130 C.M.R. 520.023(C)(1)(d), which reads “the home or former home of a nursing-facility resident or spouse held in an irrevocable trust that is available according to the terms of the trust is a countable asset.” The meaning of “available” as used throughout the federal Medicaid trust laws and MassHealth regulations does not mean physically available; rather, the term “available” refers to whether the trustee has discretion to distribute the trust principal under any circumstances to or on behalf of the Appellant. Usage of the real estate in a trust is the equivalent of an income interest in the trust. The Office of Medicaid ignores that the usage of a home is the equivalent of receipt of the income generated from rental of the home while not living there.
Before January 1, 2014, the Office of Medicaid had an official, published position on what the term “available” meant in its trust regulations, but has apparently chosen not to have a definition any longer. The Office of Medicaid’s arguments that the MassHealth applicant’s home is “available” when it is being used as a home are now based on a common usage of the word, yet before January 1, 2014, under the “Definition of Terms” in 130 CMR 515.001, the term “available” was defined as “a resource that is countable under Title XIX of the Social Security Act.” Since January 1, 2014, the word “available” has no longer been defined anywhere in the MassHealth regulations. The reckless manipulation of the MassHealth regulations by the Office of Medicaid as of January 1, 2014 has given its lawyers a modicum of legal and ethical cover to make arguments that they previously knew they could not make under federal Medicaid trust law and the prior-existing definition of “available” at 130 CMR 515.001. After the Office of Medicaid had tactically stripped the definition of the term “available” from its regulations, it began to argue that, notwithstanding the overall intention and specific terms of the irrevocable trust, usage of the home in such a trust meant that it was “available,” using the wrong definition of the word, and per se a countable asset. The proper context of the word “available,” especially where the opening paragraph in 130 CMR 520.023 states that the review process be limited to “any circumstances described in the terms of the trust,” and the title of 130 CMR 520.023(C)(1) reads “Portion Payable,” would focus on whether the principal or income of the Irrevocable Trust is distributable to or for the MassHealth applicant. The word “available” as used in the federal Medicaid trust law is essentially the same as “distributable.”
The federal Medicaid trust law at 42 USC 1396p(d)(2)(B)(i) does not make reference to usage of principal as making the principal available; rather, it deals with actual payment from the trust: “if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources available to the individual, and payments from that portion of the corpus or income.” (emphasis added) To the extent that the use of the principal could be treated as a payment, it would be an income payment because the principal is not being consumed by the life tenant. The reckless misinterpretation of 130 CMR 520.023(C)(1)(d) occurring in the MassHealth Essay is not based on what the trust states, but rather is based on what type of asset is owned by the trust.
If the MassHealth applicant’s home had been sold before the MassHealth application had been filed, and the proceeds had then been held in the Irrevocable Trust, none of the assets in the applicant’s Irrevocable Trust would be treated as countable under the MassHealth Essay’s strained reading of the MassHealth regulation. Nowhere in federal Medicaid trust law or federal SSI trust law is such an illogical outcome permitted, and the MassHealth regulations do not make such an illogical outcome apparent. “Only if the legislative history compelled a different conclusion might we depart from the plain meaning of the statute. … The application of this canon of construction is especially appropriate where the statute is understood to elicit reliance by knowledgeable persons drafting documents in response to it.” Cohen at 409.
The fact that the Office of Medicaid has only recently adopted its current position about irrevocable trusts shows that it agreed with the Cohen court’s view of the applicability of Restatement (Second) of Trusts s. 156 from the time the 1985 and 1993 laws were implemented in Massachusetts. The long-standing position of the Office of Medicaid regarding irrevocable trusts was established in a legal memorandum dated 4/29/1992, entitled “Transfer and Trust Issues Reconciliation of Department Policy,” where the standard of review, similar to Restatement (Second) of Trusts s. 156, was simply that a trust was “countable up to the limit of the trustee’s discretion to distribute it to the applicant.”
The Position of the Office of Medicaid in the Doherty Case Was That the Trust Must Be Read as a Whole, and the Trustee Had No Fiduciary Duties to the Remainderpersons
The Office of Medicaid now tends to argue in the MassHealth Essay that “the entire Trust instrument must be reviewed,” then proceeds to ignore specific provisions that show the intended unavailability of principal in the Irrevocable Trust. The Office of Medicaid attempts to convince the hearing officer isolate phrases in the Irrevocable Trust out of context, as the MassHealth Essay often states: “[t]hat there are provisions in the applicant’s trust that are at odds with each other does not change the analysis,” but under Massachusetts law phrases in trusts must not be read independently; rather, the entire trust must be read as a whole, and the Office of Medicaid pushed that very point in the Doherty case: “[A]s MassHealth strongly presses upon us, this clause may not be read in isolation; rather, it must be construed and qualified in light of the trust instrument as a whole.” Doherty at 441.
The Office of Medicaid attempts to distort the Doherty holding, yet the correct legal position about trust interpretation was stated in its brief in that case. In the September 28, 2007 brief entitled “Defendant’s Opposition to Plaintiff’s Motion for Judgment on the Pleadings” filed in Essex Superior Court by Carolann Mitchell, Assistant General Counsel of the Executive Office of Health and Human Services in the Doherty case, on page 12, the Office of Medicaid wrote: “In reviewing contracts, the courts have found that a contract must be read in such a way that no part of the agreement is left meaningless. See Starr v. Fordham, 420 Mass. 178, 190 (1995); see also S.D. Shaw & Sons, Inc. v. Joseph Rugo, Inc., 343 Mass. 635, 640 (1962). In other words, contracts must be construed to give “reasonable effect” to each provision contained therein. See State Line Snacks Corp. v. Town of Wilbraham, 28 Mass. App. Ct. 717 (1990). …To allow the one sentence … to control the whole of this document would render the Settlor’s stated intent … completely meaningless. Such an interpretation of this trust is … against the weight of the law.”
On that same page in the brief, the Office of Medicaid recognized and stressed the importance of fiduciary duties in trust analysis under Massachusetts trust law and federal Medicaid law; the Office of Medicaid took the position that the Trustee in the Doherty case had fiduciary duties, but not to the remainderpersons, but rather to the Settlor: “The unambiguous language of Article II demonstrates the Trustees’ fiduciary duty runs to Muriel, and dictates that they can use all assets of the Irrevocable Trust for her care and benefit.” The opposite is true in almost all Irrevocable Trusts, where the Trustee has fiduciary duties to the remainderpersons, and cannot distribute principal to or for the benefit of the settlor from the Irrevocable Trust without violating those duties.
The Office of Medicaid Has Recklessly or Obliviously Ignored Settled Massachusetts Case Law on Proper Interpretation of Trusts
Reading a trust as a whole has long been settled Massachusetts law. “Trust instruments must be construed to give effect to the intention of the settlor as ascertained from the language of the whole instrument considered in the light of the attendant circumstances. Groden v. Kelley, 382 Mass. 333, 335 (1981).” Harrison v. Marcus, 396 Mass. 424, 429 (1985). See also Schroeder v. Danielson, 37 Mass. App. Ct. 450, 453 (1994). Overemphasis on one or two provisions of the trust instrument is not permissible under Massachusetts trust law. “One or two expressions in the trust deed must not be so construed as to impair or destroy the whole scheme of the trust, when another and more reasonable construction is possible.” Shirk v. Walker, 298 Mass. 251, 261 (1937). If two provisions of the trust are in apparent contradiction to each other when each is read in isolation, construction must be found that will allow meaning to both provisions to resolve the apparent contradiction, as it is presumed that all provisions in a trust were intended by the settlor to have meaning. Watson v. Baker, 444 Mass. 487 (2005).
Even if a trust is ambiguous with respect to any particular issue or matter, such ambiguity would not cause the principal of a trust to be available to a MassHealth applicant. It is well established that any matter relating to the rights created by a trust instrument is a question of law that turns on the Settlor’s intent as reflected in the words of the instrument. Steele v. Kelley, 46 Mass. App. Ct. 712, 731 (1999). See also Harrison v. Marcus, 396 Mass. 424, 429 (1985); Atwood v. First Natl. Bank, 366 Mass. 519, 523-24 (1974); Berry v. Kyes, 304 Mass. 56, 59 (1939); 4 Scott, Trusts §§ 329A, 334.1 and 335 (Fratcher 4th ed. 1989). This rule of construction applies to the nature and extent of a Trustee’s discretion and to the issue of whether a trust can be terminated. “In a written trust, the nature and extent of a trustee’s discretion as to any issue is defined by (1) the terms of the trust instrument and (2) in the absence of any provision in the terms of the trust, by the rules governing the duties and powers of the trustee. Restatement (Second) of Trusts s. 164 (1959).” Guerriero at 632.
In cases of ambiguity, the settlor’s intentions control the interpretation of a trust, and that is why testimony from the drafting attorney is relevant in a MassHealth appeal involving an Irrevocable Trust. “When interpreting trust language … we do not read words in isolation and out of context. Rather we strive to discern the settlor’s intent from the trust instrument as a whole and from the circumstances known to the settlor at the time the instrument was executed. Pond v. Pond, 424 Mass. 894, 897 (1997). Berman v. Sandier, 379 Mass. 506, 510 (1980). Putnam v. Putnam, 366 Mass. 261, 266 (1974). If, read in the context of the entire document, a given word or phrase is ambiguous, we may accept and consider extrinsic evidence showing the circumstances known to the settlor when he or she executed the document. Berman v. Sandler, supra. Putnam v. Putnam, supra at 266-267.” Hillman v. Hillman, 433 Mass. 590, 593 (2001).
The Office of Medicaid Has Recklessly or Obliviously Ignored that Trustees Have Fiduciary Duties to the Remainderpersons, and Cannot Use Powers to Skew Beneficial Interests
The Office of Medicaid fails to explain why it recognizes the importance of a trustee’s fiduciary duties in MassHealth regulations at 130 CMR §515.001 and emphasized those fiduciary duties in its brief in the Doherty case, yet does not even bother to mention fiduciary duties of trustees in its MassHealth Essay.
As a fiduciary, a trustee has the dual duties of loyalty and impartiality under M.G.L. c. 203E, s. 802 and 803. A trustee may not commit any act that would harm any beneficiary, waste any property, give principal or income to anyone not entitled thereto, or take any action that would be contrary to the settlor’s intent. A trustee has “the burden of showing that he ha[s] discharged the duties of trustee with reasonable skill, prudence, and judgment.” Rugo v. Rugo, 325 Mass. 612, 617 (1950). The Court in Guerriero made clear that an important consideration in its holding was that if the Trustee violated the Trustee’s duty to a beneficiary, the Trustee would be liable for a “breach of trust.” Guerriero at 632.
In the MassHealth Essay, the Office of Medicaid ignores that it is the responsibility of the trustee to understand all provisions of the trust instrument and construe them so as to give meaning to all of them. As the Court stated in Dana v. Gring, 374 Mass. 109, 116 (1977), it is a fundamental principle of Massachusetts law “to ascertain the intention of the testator from the whole instrument, attributing due weight to all its language . . . and to give effect to that intent unless some positive rule of law forbids.”
Under the duty of impartiality, the trustee is bound to treat all beneficiaries equitably in accordance with the terms of the trust instrument construed as a whole. See King v. Nazzaro, 78 Mass. App. Ct. 1128 (2011). Thus, a power that allows a trustee to make a particular type of investment is not authority to override the intentions of the Irrevocable Trust. “Even when there are broad discretionary powers, a trustee may not exercise his or her discretion so as to shift beneficial interests in the trust.” Fine v. Cohen, 35 Mass. App. Ct. 610, 617 (1993). The trustee of the Irrevocable Trust must manage the trust’s assets in manner that is fair to both the life income and remainder beneficiaries. “[I]n the absence of instructions to the contrary [a trustee is bound] to administer his trust with an eye to the remainder interest” as well as to the interest of the life beneficiary. Blodgett v. Delaney, 201 F.2d 589, 593 (1st Cir. 1953).
The MassHealth Essay of the Office of Medicaid Has Intentionally or Obliviously Cited to a Repealed Law and Claimed that Irrevocable Trusts Are Revocable
Many copies of the MassHealth Essay have even gone so far as to cite a repealed Massachusetts probate law as though it were current law. The Office of Medicaid’s cite in the MassHealth Essay to M.G.L. c. 203, § 25A evinces its lack of knowledge or truthfulness regarding trust law, where such law was repealed in 2008, and undercuts any of the Office of Medicaid’s claims for judicial deference, as this agency has shown by its own words that it lacks technical competence and specialized knowledge in the area of trust law.
The Office of Medicaid often routinely makes the claim that an Irrevocable Trust is revocable or arguably revocable in various situations that have nothing to do with revocability. In recent fair hearings, Office of Medicaid has issued that label without further explanation when the trustee can make distributions to terminate the trust to persons other than the appellant or the appellant’s spouse, and once made the stunningly inventive claim that if none of the potential distributees were then living, the trustee could then make the terminating distributions to the settlor. In one case, the Office of Medicaid has made the claim that if a trust protector could amend the trust, it is then revocable.
Nothing is ever presented by the Office of Medicaid to support its revocability argument. Something that is revoked is recalled, retracted, reversed, rescinded, canceled, nullified or taken back. An action that is not to the settlor and that is without the settlor’s involvement cannot possibly meet any definition of the word “revocable.” The memorandum of the Office of Medicaid does not ever explain how these limited provisions held by someone other than the settlor can ever cause an Irrevocable Trust to be revocable.
The Office of Medicaid is not entitled to make up new definitions of common words and phrases. “See Comey v. Hill, 387 Mass. 11, 15 (1982), quoting 2A Sands, Sutherland Statutory Construction s. 50.03, at 277-278 (4th ed. 1973) (“Words and phrases having well-defined meanings in the common law are interpreted to have the same meanings when used in statutes dealing with the same or similar subject matter as that with which they were associated at common law”).” Cohen at 413-414.
The choice of the Office of Medicaid in the MassHealth Essay to attempt to cite a repealed law and claim that an Irrevocable Trust is revocable shows the extreme lengths to which it will now go to try to attack trusts through the fair hearing process, rather than go through the regulatory process that is open to the public and potentially be required to defend the regulations in a declaratory judgment action. If the Office of Medicaid is truly unaware of the obvious difference between a power of revocation held by a settlor and a termination power held by a trustee or a limited power of amendment held by a trust protector, then all of its other statements of law, as well as its claims for deference, are necessarily called into question.
The Latest Positions of the Office of Medicaid on Trust Interpretation Are Not Entitled to Judicial Deference
These new positions of the Office of Medicaid regarding how a trust should be viewed or treated are not entitled to deference. The Supreme Judicial Court, in Cohen, footnote 18, stated why it chose not to give deference to the MassHealth agency’s position in that case, and the same point applies here: “The Commonwealth urges us to give deference to the division’s administrative interpretation of the statute. Although there is some merit to the argument, it is not served up in its most appetizing form in this case. … It is usually the initial not the changed interpretation of a statute that earns the kind of deference the Commonwealth would need here. See Barnett v. Weinberger, 818 F.2d 953, 960-961 n.74 (D.C. Cir. 1987), and cases cited (deference depends on consistency of interpretation).”
Every MassHealth Applicant and Appellant Is Entitled to Reasoned Consistency in Agency Decision-Making
The Office of Medicaid apparently believes it has no duty of consistency or disclosure, and it is apparent that the Office of Medicaid intends to repeat issuing the MassHealth Essay as long as the Board of Hearings allows such misbehavior to continue. While agencies are not bound in perpetuity to repeat an error, they are not entitled to keep slinging the same thing against the wall and hoping it will eventually stick. Unfortunately, the Office of Medicaid has access to and knowledge of what the facts were in the previous fair hearing decisions where its positions were rejected, but does not mention them or make the trusts available on a redacted basis. As its excuse for attacking all trusts without concern for previous rulings in fair hearing decisions, the Office of Medicaid tends to claim that all cases involving trusts have different facts. When trusts from previous fair hearing decisions are subpoenaed by the appellant, however, the Office of Medicaid chooses not to back up its easily-made claims, and refuses to honor any subpoena issued under M.G.L. c. 30A, s. 12.
A party is entitled to “reasoned consistency” in agency decision-making. Boston Gas Co. v. Department of Pub. Utils., 367 Mass. 92, 104 (1975). In Davila–Bardales v. Immigration and Naturalization Service, 27 F.3d 1 (1994) the First Circuit of the United States Court of Appeals stated that the law prohibits an agency “from adopting significantly inconsistent policies that result in the creation of conflicting lines of precedent governing the identical situation. …[T]he law demands a certain orderliness. ” The MassHealth Essay of the Office of Medicaid cites only fair hearing and Superior Court decisions where appellants lost, but the Office of Medicaid has a duty to provide and explain decisions where appellants prevailed because it has a duty of administrative consistency. An administrative agency must respect its own precedent, and cannot change it arbitrarily and without explanation, from case to case. Mendez-Barrera v. Holder, 602 F.3d 21 (1st Cir. 2010). As a general matter, an agency cannot treat similarly situated entities differently unless it supports the disparate treatment with a reasoned explanation and substantial evidence in the record. Lilliputian Systems, Inc. v. Pipeline and Hazardous Materials Safety Admin., 741 F.3d 1309 (D.C. Cir. 2014).
The Office of Medicaid appears to be claiming that it can continue ad infinitum to make eligibility determinations that are inconsistent with the results of its own administrative adjudicatory proceedings. In doing so, it seems to show confusion about its own agency structure. The Board of Hearings is a part of the Office of Medicaid, and under M.G.L. c. 118E, s. 48, “[t]he decision of the referee shall be the decision of the division.” Thus, a hearing officer’s decision represents the final position of the Office of Medicaid, and that is why it is a violation of the duty of administrative consistency to continue to issue eligibility determinations that ignore and are inconsistent with the previous fair hearing decisions of the agency. Under the doctrine of offensive issue preclusion, also known as offensive collateral estoppel, the Office of Medicaid is prohibited from continuing to bring up issues where its position had already been ruled against. Bellermann v. Fitchburg Gas and Electric Light Company, 470 Mass. 43, 60 (2014).
The Office of Medicaid is failing to fulfill the agency’s duties, where under 42 CFR 435.901, “[t]he Medicaid agency’s standards and methods for determining eligibility must be consistent with the objectives of the program and with the rights of individuals under the United States Constitution, the Social Security Act, title VI of the Civil Rights Act of 1964, section 504 of the Rehabilitation Act of 1973, and all other relevant provisions of Federal and State laws.”
In MassHealth Trust Denial Cases, the Office of Medicaid Is Not Conducting Itself as an Administrative Agency Should Conduct Itself
Much of the MassHealth Essay of the Office of Medicaid is boilerplate, and it seems quite unlikely that any misleading quotes or misstatements of law are unintentional. The quotes throughout the MassHealth Essay are selected primarily for how they sound out of context, do not represent thoughtful case analysis by the Office of Medicaid, and do not comply with the proper role of the agency.
The proper and ethical role of a government lawyer is to see that the law is followed, not simply to win. “Any ethical and procedural obligation of a private attorney to be fair to opponents and candid with the court is enforceable when the litigant is represented by an attorney for the government. As a United States Attorney General put it more than a hundred years ago, “in the performance of . . . his duty . . . he is not a counsel giving advice to the government as his client, but a public officer, acting judicially, under all the solemn responsibilities of conscience and legal obligations.” 6 Ops. Atty. Gen. Office and Duties of Attorney General 326, 334 (1854) (Caleb Cushing to the President).” Zimmerman v. Schweiker, 575 F. Supp. 1436, 1440 (E.D.N.Y. 1983). “[C]ounsel for the government, no less than their colleagues in the private sector, are bound by the same obligations to the court. There is, indeed, much to suggest that government counsel have a higher duty to uphold because their client is not only the agency they represent but also the public at large. Cf. MODEL CODE OF PROFESSIONAL RESPONSIBILITY EC 7-14 (1981) (“A government lawyer in a civil action . . . has the responsibility to seek justice and to develop a full and fair record, and he should not use his position or the economic power of the government to harass parties or to bring about unjust settlements or results.”).” Gray Panthers v. Schweiker, 716 F.2d 23, 33 (D.C. Cir. 1983). (emphasis added)
Unfortunately, the Office of Medicaid has been using its extreme distortion of the Doherty case (as well as its disavowal of its written position in that case) as an excuse to attack all irrevocable trusts, and ignores anything in the trust, as well as any case or any law or even any contrary fair hearing or Superior Court decision, that is favorable to any appellant.
The Office of Medicaid and Its Board of Hearings Are Complicit in Denials of Due Process to MassHealth Appellants
Under 130 C.M.R. 610.065(A)(4), the Board of Hearings has the duty “to ensure that all parties have a full opportunity to present their claims orally or in writing and to secure witnesses and evidence to establish their claims.” Unfortunately, whenever a negative legal opinion is given to the MassHealth worker, it is tactically withheld from the appellant until the time of the fair hearing. The appellant in such a situation is routinely provided with no information from the Office of Medicaid about any reason for the denial and cannot adequately prepare for a fair hearing. Without knowing whether there is an issue of fact, or an issue of law, or a combination of factual and legal issues, about why the denial was issued, the appellant’s due process rights are violated and the appellant cannot adequately prepare for a fair hearing.
It is unfair for the Office of Medicaid to be allowed by its own Board of Hearings to maintain a secretive position. The Board of Hearings, according to M.G.L. c. 118E, s. 48, is supposed to be “independent of all other subdivisions and personnel of the division,” yet requests by appellants for advance information about the denial are routinely rejected by hearing officers.
Due process, according to Armstrong v. Manzo, 380 U.S. 545, 552 (1965), “is an opportunity which must be granted at a meaningful time and in a meaningful manner.” M.G.L. Chapter 30A, Section 10 states, in relevant part: “In conducting adjudicatory proceedings … agencies shall afford all parties an opportunity for full and fair hearing.” (emphasis added) M.G.L. Chapter 30A, Section 11(1) states: “Reasonable notice of the hearing shall be accorded all parties and shall include statements of the time and place of the hearing. Parties shall have sufficient notice of the issues involved to afford them reasonable opportunity to prepare and present evidence and argument. If the issues cannot be fully stated in advance of the hearing, they shall be fully stated as soon as practicable. In all cases of delayed statement, or where subsequent amendment of the issues is necessary, sufficient time shall be allowed after full statement or amendment to afford all parties reasonable opportunity to prepare and present evidence and argument respecting the issues.” (emphasis added)
As was recently explained by the United States District Court for the District of Idaho in the case of K.W. v. Armstrong, 2014 WL 1247771 (March 24, 2014), where a class action was certified for due process violations similar to what the Office of Medicaid is now doing in Massachusetts, Medicaid requires that the notices “must contain . . . [t]he reasons for the intended action.” See 42 C.F.R. § 431.210(b). The notices must “detail the reasons for a proposed termination” sufficiently enough for a recipient to challenge both the application of the law to their factual circumstances and the “factual premises” of the state’s action. Goldberg v. Kelly, 397 U.S. 254, 267–268 (1970). The explanation in the notice itself must be more than a “general explanation” or “conclusory statement,” and must provide at least “a brief statement of [the decision’s] factual underpinnings.” Barnes v. Healy, 980 F.2d 572, 579 (9th Cir. 1992). In other words, the law requires an explanation. The applicant is entitled to know why the application was denied. Goldberg recognized that without such an explanation, the right to challenge the change is substantially impaired, if not meaningless. The lack of specificity runs afoul of due process because Goldberg requires a notice tailored to the individual. Goldberg at 267-68 (“[Due process] require that a recipient have timely and adequate notice detailing the reasons for a proposed termination . . . ”). The notice must give an applicant the opportunity to understand “the factual premise” of his or her “particular case.” Goldberg at 268.
In MassHealth appeals involving trusts, where the filing of the MassHealth Essay does not occur until the fair hearing has already begun, the applicant is left until that time to attempt to figure out why the denial was issued. This burden shifting is impermissible, as it is the Office of Medicaid’s duty to state initially the reasons for its action. Goldberg at 267-68.
As the elder law bar knows from dozens of recent appeals, it is not really the case that the issues cannot be fully stated by the Office of Medicaid prior to the date of the hearing; rather, not stating the issues prior to the hearing is a choice, done solely for tactical reasons. If the intentionally secretive position of the Office of Medicaid were disclosed to the appellant, then the appellant could determine how to prepare for the fair hearing, but the Office of Medicaid apparently does not want to allow the appellant to be able to prepare. To be required to travel to and from a the fair hearing in order to learn why the denial was issued (as well as to sit in front of the hearing officer reading a lengthy, single-spaced memorandum) has been a common occurrence at many recent fair hearings, and would seem to be a foolish waste of everybody’s time.
Even though such an unappetizing maneuver has been the recent pattern and practice of the Office of Medicaid in dealing with fair hearings, familiarity with it does not make it right. The intentional, routine, tactical nondisclosure by the Office of Medicaid until the time of the hearing denies the appellant the right to a full and fair hearing as required under M.G.L. Chapter 30A, Section 10. The lawyer representing the Office of Medicaid can claim attorney-client privilege and state that it is up to the client as to whether or not to file the memorandum, and can claim that the appellant is therefore theoretically not entitled to it until it is placed into the fair hearing record, but, notwithstanding that transparent excuse, the Office of Medicaid has a legal duty to provide the appellant with the reasons for the denial and the appellant has the legal right to be able to prepare for the fair hearing. The appellant has the right to present witnesses, but, without knowing about the reasons for the denial, cannot determine which witnesses should be brought to the fair hearing on factual matters. The appellant has the right to hire expert witnesses on different types of legal issues, but does not know whether to do so, or what the legal issues or specific questions may be. The appellant has the right to the issuance of subpoenas to compel testimony or the production of documentary evidence, but does not even know, until the hearing has begun, who was involved in the decision to issue the denial.
Federal Medicaid law at 42 U.S.C. §1396a(a)(19) requires that each state Medicaid program be administered “in a manner consistent with simplicity of administration and the best interests of the recipients,” and M.G.L. Chapter 118E, Section 12 echoes such requirements. To be in compliance with federal Medicaid law, the Commonwealth of Massachusetts was required under 42 U.S.C. s. 1396a(a)(3) to institute a fair hearing process. Federal regulations at 42 C.F.R. Part 431, Subpart E describe the mandated fair hearing process; the regulation at 42 C.F.R. 431.205 provides that “[t]he hearing system must meet the due process standards set forth in Goldberg v. Kelly, 397 U.S. 254 (1970), and any additional standards specified in this subpart.” The regulation at 42 C.F.R. 431.240 states that “[a]ll hearings must be conducted …[o]nly after adequate written notice of the hearing.” The regulation at 42 C.F.R. 431.210(b) requires that the denial notice must contain “[t]he reasons for the intended action.” Echoing the federal law, the Massachusetts fair hearing regulation at 130 C.M.R. 610.026(A)(2) states the requirement that the denial notice must contain “[t]he reasons for the intended action.” As part of the appellant’s due process rights, the Massachusetts fair hearing regulation at 130 C.M.R. 610.046 states that “[a]t least 10 days’ advance written notice will be mailed by the Board of Hearings to all parties involved to permit adequate preparation of the case.” (emphasis added) The Massachusetts fair hearing regulation at 130 C.M.R. 610.050 states that “[t]he appellant and his or her appeal representative will have reasonable opportunity to examine the entire contents of the appellant’s case file, as well as all documents and records to be used by the MassHealth agency … at the hearing.” (emphasis added)
Any lawyer representing the Office of Medicaid, and not acting as a de facto member of the policy arm of the Office of Medicaid, would have an ethical duty to advise the client to follow all of these laws and regulations. A lawyer cannot validly claim to be a lawyer representing the client for some purposes and not for others.
Where the Office of Medicaid is not choosing to follow the law, it is the duty of the Board of Hearings not to condone such illegal behavior, but rather to take affirmative steps to ensure that due process is afforded to all appellants. Unfortunately, it appears that the Director of the Board of Hearings has passively condoned the actions of the Office of Medicaid and failed to provide appropriate training to hearing officers on these key issues of due process.
The Director of the Board of Hearings does seem to realize that what the lawyers at the Office of Medicaid are getting away with is wrong. In Appeal 1409508, a request for the position of the Office of Medicaid was made directly to her instead of to the hearing officer, and she emailed the hearing officer: “If MassHealth is in possession of a legal memorandum that it will rely upon and submit to the hearing record it should be sent to appellant’s counsel to allow adequate preparation for the hearing.” Unfortunately, the due process problem is not solved by her suggestion, because the lawyer representing the Office of Medicaid can simply wait and submit the memorandum to the MassHealth worker on the date of the hearing. Thus, there is an appearance that the Director of the Board of Hearings cares about due process, but there has been no follow-up action from her to solve the ongoing problem.