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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 was named a Massachusetts Super Lawyer® in Boston Magazine in 2009, 2010, 2011, 2012 and 2013 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.

The Office of Medicaid and Its Board of Hearings Are Complicit in Denials of Due Process to MassHealth Appellants

April 21, 2015

hder 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.

Did the Office of Medicaid Intentionally Violate Federal Medicaid Trust Law When It Stripped the Definition of the Word “Available” from MassHealth Regulations?

April 13, 2015

Before January 1, 2014, the Office of Medicaid in Massachusetts had an official, published position on what the term “available” meant in its MassHealth regulations, but the Office of Medicaid has apparently chosen not to have a definition any longer.  Some hearing officers are now reviewing MassHealth trust regulations at fair hearings and ruling that some irrevocable trusts have countable assets due to the now-undefined word “available” in the MassHealth regulations.

The proper review of irrevocable trusts for whether they are countable assets is set forth in the federal Medicaid trust law at 42 USC § 1396p(d)(3)(B)(i), which states: “In the case of an irrevocable trust, if there are any circumstances under which payment from the trust could be made to or on behalf 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.”  (emphasis added)  The Office of Medicaid is required to implement this federal law in Massachusetts, yet has chosen to make the regulation unclear. The regulation at 130 CMR 520.023(C), which contains the newly-undefined word “available” in (1)(d), reads, in its entirety:

“(C) Irrevocable Trusts.

(1) Portion Payable.

(a) 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.

(b) Payments from the income or from the principal of an irrevocable trust made to or for the benefit of the individual are countable income.

(c) Payments from the income or from the principal of an irrevocable trust made to another and not to or for the benefit of the nursing-facility resident are considered transfers of resources for less than fair-market value and are treated in accordance with the transfer rules at 130 CMR 520.019(G).

(d) 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. Where the home or former home is an asset of the trust, it is not subject to the exemptions of 130 CMR 520.007(G)(2) or 520.007(G)(8).

(2) Portion Not Payable. Any portion of the principal or income from the principal (such as interest) of an irrevocable trust that could not be paid under any circumstances to or for the benefit of the nursing-facility resident will be considered a transfer for less than fair-market value and treated in accordance with the transfer rules at 130 CMR 520.019(G).”

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.” After the Office of Medicaid had intentionally stripped the definition of the term “available” from its regulations as of January 1, 2014, its lawyers began to argue at fair hearings that, notwithstanding the overall intention and specific terms of the irrevocable trust, simple usage of a home in an irrevocable trust meant that it was “available.” By deviously using the wrong definition of the word it had intentionally chosen no longer to define, at least one lawyer representing the Office of Medicaid is now claiming that if the home or former home of the MassHealth applicant is an asset of the trust, the home is automatically deemed to be a countable asset and no determination ever needs to made as to whether principal or income is distributable by the trustee to or for the MassHealth applicant.

The proper context of the word “available,” 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,” would focus on whether the principal or income of the irrevocable trust is distributable to or for the MassHealth applicant. Residing in the property does not mean the principal is “available” to the settlor of the trust as the term is used in 130 C.M.R. 520.023(C)(1)(d).  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 for the settlor.  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 usage of the home could be viewed as a payment, it would be an income payment because the principal of the trust is not being consumed by merely living there.

This manipulation of the MassHealth regulations as of January 1, 2014 by the Office of Medicaid has given its lawyers (who presumably had been involved in writing the new regulations) 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.  Such manipulation of the MassHealth regulations is in violation of the federal Medicaid trust law that the Office of Medicaid is required to implement, but to at least some lawyers representing the Office of Medicaid, the ends apparently justify the means.  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 be susceptible to being misled.

The opening paragraph in 130 CMR 520.023, the MassHealth trust regulations, provides no intellectual guidance in determining what the word “available” is supposed to mean, in that it uses that word twice in the same sentence without providing any definition:  “Generally, resources held in a trust are considered available if under any circumstances described in the terms of the trust, any of the resources can be made available to the individual.”  Nevertheless, a key MassHealth regulation at 130 CMR 515.002(B) provides an overarching regulatory requirement: “These regulations are intended to conform to all applicable federal and state laws and will be interpreted accordingly.”  Further, in the MassHealth regulations at 130 CMR 520.021, entitled “Treatment of Trusts,” the MassHealth trust regulations themselves anticipate misinterpretation or their own overreach by stating:  “In the event that a portion of 130 CMR 520.021 through 520.024 conflicts with federal law, the federal law supersedes.”

Having received a misleading essay from Attorney Schelong, representing the Office of Medicaid, Hearing Officer Paul C. Moore still ruled in Fair Hearing Decision 1409671 that the irrevocable trust did not allow principal to be distributed to the MassHealth applicant, yet he felt constrained by 130 CMR 520.023(C)(1)(d) to rule that the applicant’s former home that was held by the trust was nevertheless a countable asset; Attorney Schelong had written: “given that the applicant was, and the spouse is living in the real estate held in the Trusts, the principal is actually available to the spouse and was being used for the benefit of the spouse and applicant.  130 CMR 520.023. MassHealth regulation 130 CMR 520.023(C)(l)(d) provides that “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.”  Since under the facts as well as the terms of the Trusts, the real estate is available, it is countable and not subject to exemptions related to real estate.”  Thus, there is no question that the Office of Medicaid is exploiting the fact that the definition of “available” no longer exists in its MassHealth regulations.

In Fair Hearing Decision 1407312, the Office of Medicaid took its sham definition act even further, with Attorney Schelong writing:  “There is no delineation in this regulation that the terms of a trust must provide that both the income and principal are available in order for the fair market value of the home to be countable.”  Hearing Officer Kenneth Brodzinski adopted that recklessly misleading position, then stretched the vagueness of the regulation at 130 CMR 520.023(C)(1)(d) into the absurd ruling that all of the irrevocable trust’s assets, not just the home, were countable, as all of the other assets of the trust could be sold and used to make repairs or improvements to the “available” home.

Does it make any sense that a particular type of trust investment would cause an irrevocable trust to fail under federal Medicaid trust law, even if nothing at all could be distributed to the settlor of the trust? Oddly enough, if the home of the MassHealth applicant in Fair Hearing Decision 1409671 or 1407312 had been sold before the MassHealth application was filed, and the proceeds were then held in the irrevocable trust, none of the assets in the irrevocable trust would have been treated as countable under this strained reading of this newly-vague MassHealth regulation. Perhaps, then, the new unwritten rule in dealing with this new, flawed regulatory interpretation should be:  if the MassHealth applicant’s home or former home is in an irrevocable trust, sell it (even if merely through a paperwork-only transaction) before filing a MassHealth application.

Any confusion about what the regulation at 130 CMR 520.023(C)(1)(d) means was caused by an intentional administrative action as of January 1, 2014 by the Office of Medicaid. Lawyers representing the Office of Medicaid cannot pretend that the definition of “available” never existed in MassHealth regulations, and they are bound by the duty of administrative consistency to follow the definition used before 2014, or explain why that particular definition does not apply. To be in charge of implementing federal Medicaid trust law yet pretend not to know what the word “available” is supposed to mean may well be unethical conduct.

Is the Term “Interested Person” Meant to Be Broadly Defined under Massachusetts Guardianship and Conservatorship Law?

April 9, 2015

In the case of Guardianship of B.V.G., decided on April 6, 2015, the Massachusetts Appeals Court took a look at the Massachusetts Uniform Probate Code (“MUPC”) to determine whether a grandfather was an interested person who had standing in the guardianship proceedings. The child’s father was objecting to the grandfather’s involvement in the guardianship case.

The term “interested person” in M.G. L. c. 190B, § 1-201(24), the general definition section of the MUPC, “includes heirs, devisees, children, spouses, creditors, beneficiaries, and any others having a property right in or claims against a trust estate or the estate of a decedent, ward, or protected person.  It also includes persons having priority for appointment as personal representative, and other fiduciaries representing interested persons.  The meaning as it relates to particular persons may vary from time to time and shall be determined according to the particular purposes of, and matter involved in, any proceeding.”

The Massachusetts Appeals Court ruled that the terms “interested person,” found in one part of the law, and “person interested in the welfare of the incapacitated person,” found elsewhere in the law, were equivalent.  The MUPC, according to the Court, favors “limited guardianships in order to maximize the liberty and autonomy of persons subject to guardianship,” and [a]llowing a broader class of individuals than those with economic interests to press for limitations on a guardianship furthers that goal.”  Thus, the phrase “interested person” is meant to broadly defined under Massachusetts guardianship and conservatorship law.

Do the Lawyers Representing the Office of Medicaid in Massachusetts Know What a Revocable Trust Is?

April 8, 2015

At Massachusetts fair hearings, the Office of Medicaid often routinely makes the claim that irrevocable trusts are revocable or arguably revocable in various situations that have nothing to do with revocability, as if the word “revocable” were meaningless. In past fair hearings, the 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 settlor or the settlor’s spouse. In one case, the Office of Medicaid has made the claim that if a trust protector (who was not the settlor of the trust) could make administrative amendments to the trust, it was then revocable.

The Office of Medicaid recently made the stunningly inventive claim that if the Trustee had the power to make distributions to the settlor’s children but none of them were alive, the trustee could then make the terminating distributions to the settlor. The fact that there was nothing in the trust that said so did not seem to matter to the lawyer at the Office of Medicaid. (See Fair Hearing Decision 1401521, page 9, footnote 1, where the hearing officer, Sara E. McGrath, rejected that claim: “I am not persuaded by the MassHealth argument that if the appellant has no children, the trustees’ discretionary power to distribute principal during appellant’s lifetime to her then living children somehow gives the trustees the power to distribute principal to the appellant.”

Unfortunately, nothing is ever presented by the Office of Medicaid to support its revocability arguments. It is hard to believe that the Office of Medicaid has not found that the definition of the term “revocable trust” can be found in the State Medicaid Manual, section 3259.1 A.5., which states: “Revocable Trust.– A revocable trust is a trust which can under State law be revoked by the grantor.” The definition of the word “revocable” can also be found in M.G.L. c. 203E, Section 103 as “a trust that is revocable by the settlor without the consent of the trustee or a person holding an adverse interest,” and the definition of the word “settlor” can be found there as “a person … who creates or contributes property to a trust.” M.G.L. c. 203E, Section 112(1) states that a “revocable trust” is a trust that is “revocable by the settlor until the time of the settlor’s death.”

Despite all of these definitions, on January 1, 2014, the Office of Medicaid put this definition into its regulations at 130 CMR 515.001: “Revocable Trust – a trust whose terms allow the grantor to take action to regain any of the property or funds in the trust.” Thus, the Office of Medicaid has apparently manipulated its regulations so that lawyers at the Office of Medicaid would have some degree of ethical protection that would allow them to make claims about irrevocable trusts being revocable or arguable 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 v. Comm’r of Div. of Med. Assistance, 423 Mass. 399, 413-414 (1996).

The choice of the lawyers at the Office of Medicaid to attempt to claim that irrevocable trusts are revocable shows the extreme lengths to which they will now go to try to attack all trusts through the fair hearing process. 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 judicial deference, are necessarily called into question.

What Are the 2015 Federal Estate and Gift Tax Filing Figures?

November 14, 2014

The Internal Revenue Service has recently announced that in 2015 the federal estate tax exemption will rise from $5,340,000.00 to $5,430,000.00 per person. (Under current law, this figure is adjusted annually for inflation.) Married couples can get the benefit of two exemptions, so in 2015 the total federal estate tax exemption per couple can be $10,860,000.00. The top estate tax rate on amounts above the exemption is 40%.

Under a 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.

Few estates are expected to owe any federal estate tax in 2014, 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 Massachusetts residents has changed to minimizing capital gains taxes and the Massachusetts estate tax, which begins at a taxable estate of $1,000,000.00, with a minimum tax of $33,200.00.

The Internal Revenue Service has also announced that in 2015 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 $147,000.00 in 2015.

Gifts made in excess of the $14,000.00 or $147,000.00 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.

Potential Annuity Purchases by the Trustee Do Not Provide the Settlor of an Income-Only Irrevocable Trust with Access to Principal

May 22, 2014

As noted in prior posts, many irrevocable trusts in Massachusetts are now under wrongful attack during the MassHealth application process by the Office of Medicaid. One of the more specious arguments brought forth by the Office of Medicaid has been that the Trustee could purchase an annuity and thereby provide the Settlor of the trust with access to principal. Unfortunately, the memorandum of the Office of Medicaid that is typically filed at MassHealth fair hearings betrays a fundamental ignorance of basic annuity principles and trust law. When a payment is received from an annuity, the portion of the payment that represents a return of principal is nontaxable, and reasonable accounting principles require the trustee to allocate the return of principal to the corpus or principal of the trust.

Section 103(a)(4) of the Uniform Principal and Income Act, as adopted in Massachusetts as M.G.L. c.203D, s. 3(a)(4), states that, in allocating receipts and disbursements to or between principal and income, a trustee “shall add a receipt or charge a disbursement to principal if the terms of the trust … do not provide a rule for allocating the receipt or disbursement to or between principal and income.”  Thus, the legal presumption in Massachusetts is that any amount received by a trustee is not income, but rather principal. In the absence of explicit contrary powers in the trust, the trustee has no power to deviate from generally accepted practices of fiduciary accounting when determining what is income and what is principal. See Restatement (Third) of Trusts §233, comment p.

Under the Massachusetts Principal and Income Act, “[i]f a payment is characterized as interest or a dividend or a payment made in lieu of interest or a dividend, a trustee shall allocate it to income. The trustee shall allocate to principal the balance of the payment and any other payment received in the same accounting period that is not characterized as interest, a dividend, or an equivalent payment.” G.L. c. 203D, § 18(a). The Massachusetts Principal and Income Act also provides that “[a]n amount received as interest, whether determined at a fixed, variable or floating rate on an obligation to pay money to the trustee, including an amount received as consideration for prepayment of principal, shall be allocated to income without any provision for amortization of premium.” G.L. c. 203D, § 15(a). Thus, annuity distributions cannot be treated solely as income under Massachusetts law, where most of such payments are a return of principal.

The memorandum of the Office of Medicaid typically points to Massachusetts law and states that trustees are specifically given the power to invest in annuities, but the Office of Medicaid’s cite to M.G.L. c. 203, § 25A, a section of the Massachusetts Uniform Trust Code (“MUTC”), is pointless.  The MUTC simply codifies the rather uncontroversial point that a trustee’s authority includes the power to invest in annuities.  The draftspersons of the MUTC recognized that trustees needed to be able to make investments without always going through the expense of asking for court permission, so if a trust is silent with respect to annuities, the MUTC would authorize the trustee to purchase an annuity as an investment.  That trustee power, however, is irrelevant to the question of whether the trustee has the discretion to distribute principal to the applicant. The Office of Medicaid cites regulations in support of its position that all payments from annuities are “income,” but if the irrevocable trust does not make reference to those regulations, it is instead governed by its express terms, common law and statutory authority, including the Massachusetts Principal and Income Act.

The Office of Medicaid completely ignores the Massachusetts Principal and Income Act in its memorandum of “law.”  The Office of Medicaid may not unilaterally impose its own definition of “income” from another context and create unintended definitions of terms and phrases within an irrevocable trust. Allowing any state agency to do so would wreak havoc on well-established trust doctrine, upset settled legal expectations of settlors, trustees and beneficiaries, and be in violation of the Massachusetts Principal and Income Act.

A Life Estate in an Irrevocable Trust Should Not Cause the Trust to Be a Countable Asset for MassHealth Purposes

May 18, 2014

In the misleading, unfair and unbalanced memorandum entered into the fair hearing record at MassHealth trust denial cases, the Office of Medicaid usually takes a legally invalid view of life estates that are contained within trusts. The Office of Medicaid makes the specious argument that a life estate in a trust provides access to the principal of the trust, but makes that statement in a conclusory fashion, without explaining how that could possibly be. The position of the Office of Medicaid is directly contrary to what the Supreme Judicial Court wrote in Cohen v. Comm’r of the Div. of Med. Assistance, 423 Mass 399 (1996), that the authority of a trustee to distribute income is not equivalent to the authority of a trustee to distribute principal to the Settlor.

A life estate is established when all of the remainder legal interest in a property is transferred to another, while the legal interest for life rights to use, occupy, or obtain income or profits from the property is retained. See 130 CMR 515.001. The life tenant does not own the principal, so the life tenant is without access to it, and it is not available to the life tenant.

A beneficiary who has the right to live in a house does not have the right to sell or mortgage that house, and the same applies whether the life estate is in the deed or in the trust. “[T]he mere fact that a transferee who is to receive the benefits of the property for life is called a “trustee” is not conclusive and a legal life estate may be found to have been created.” Bogert Hess, The Law of Trusts & Trustees (Third Edition), s. 27 @ 379. See also Schaefer v. Schaefer, 141 Ill. 337, 31 N.E. 136 (1892); Thompson v. Adams, 205 Ill. 552, 69 N.E. 1 (1903). A life estate holder within a trust cannot mortgage the life estate or any other part of the trust because the life tenant cannot give legal title, which is held by the trustee. Further, being trustee and taking principal when entitled to only an income interest is a breach of the trustee’s fiduciary duty.

If the life estate is contained in a deed and the property is sold, the life tenant is entitled to a portion of the net sale price, calculated under Medicaid law based on actuarial tables, but the liquidation value of the life estate is an inaccessible asset unless the remainderpersons choose to participate in the sale. If the life estate is a beneficial interest in a trust, the life tenant does not have any right to any of the sale proceeds, because the proceeds belong to the trust; the life tenant would then be entitled only to the income that could be generated by investing the sale proceeds.

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