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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 has been named a Massachusetts Super Lawyer® in Boston Magazine in 2009-2016 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.

Reservation of Special Power of Appointment in Deed Is Approved by Massachusetts Appeals Court in 2017 Case of Skye v. Hession

May 1, 2017

A special power of appointment is an estate planning technique whereby someone reserves or is given a limited power to make a change to who ultimately inherits and under what circumstances. (For more information in the elder law context, see Using Reserved Special Powers of Appointment in Medicaid Planning.)  In Skye v. Hession, the Massachusetts Appeals Court held that the reservation and later exercise of a special power of appointment in a deed was valid.

There is not a lot of complex analysis in the decision.  The original owner of the real estate had wanted to transfer the real estate so that it would not be owned by her for MassHealth purposes in case of a long-term stay in a nursing home, but wanted to keep the right to change the shares received by her family. The person whose share was later reduced by the original owner’s will objected to the allowance of the will and filed a separate declaratory judgment action to have the right to make the change declared null and void.

This type of real estate transfer has been done in Massachusetts for decades, and it had not been challenged before.  The Court acknowledged that there was tension between moving the real estate out of the owner’s name and reserving the power to change who ultimately received it. The Court ruled that, because the owner had also reserved a life estate, the interests created by the deed were not “present possessory estates” but rather “remainder interests” which were “circumscribed by the reserved power of appointment,” and therefore what the persons received in the original deed were “fees simple defeasible.” Putting it in non-legalese, the Court ruled that a person can deed away real estate yet keep the right to change who will later receive it.

For Medicaid purposes, a deed with a reserved special power of appointment removes ownership from the original owner and does not allow the owner to take it back in any way, and thereby preserves the real estate in case of a long-term nursing home stay after the five-year lookback period.  In some states, elder law attorneys can go further, and the deed, known as a Ladybird deed or a deed with enhanced powers or an enhanced life estate, can reserve the right to sell the real estate or take it back. In Massachusetts, the most that can be reserved is a special power of appointment, as MassHealth regulations at 130 CMR 520.019(I)(1) treat a Ladybird deed as a revocable trust, which means that the real estate is therefore a countable asset for MassHealth purposes. (Note that a simple change in regulations in other states could do the same to all Ladybird deeds, as the owner who records a Ladybird deed never really gives up anything.)

Back in the early 1990’s, I had proposed a reserved special power of appointment in a deed as a valid Medicaid planning tool in articles published nationally (See, e.g., “Despite Medicaid Transfer Restrictions, the Home May Still Be Kept in the Family,” Estate Planning, March/April 1990; “Using Reserved Special Powers of Appointment in Medicaid Planning,” The ElderLaw Report, October 1990; and “Using Special Powers of Appointment in Medicaid Planning,” NAELA Quarterly, Spring 1992.)  The benefit of reserving such a power has always been that the person signing the deed can later adjust the deed based on changes in family dynamics, but in recent years there have been national legal developments causing a reserved special power of appointment in a deed to perhaps be preferable to a reserved life estate for tax purposes.  Both of these techniques under current law allow the recipients to obtain a step-up in basis for capital gains tax purposes upon the original owner’s death, but if Congress returns us to the modified carryover basis rules, which were federal tax law back in 2010, a reserved special power of appointment may allow maneuvering to achieve the desired step-up in basis. (See Which Powers of Appointment Are Eligible for a Step-up in Basis in 2010 under the Modified Carryover Basis Rules? and the blog posts linked therein.)

I would not be surprised if Skye v. Hession is appealed to the Supreme Judicial Court (“SJC”) on an application for Further Appellate Review.  There weren’t many Massachusetts cases cited by the Massachusetts Appeals Court, but four of them were ancient (1825, 1829, 1838 and 1847), and in footnote 9, the Court declined to identify the type of defeasible fee in these remainder interests, which suggests that a deeper review of the transaction could be conducted if the SJC takes the case.  Ultimately, however, I think the case of Queler v. Skowron, 438 Mass. 304 (2002) will be controlling.  The Queler holding approved the equivalent of a general power of appointment (which is an even greater reservation by the original owner than a special power of appointment).  There were separate lots in the Queler deed, and the grantor of an attempted condominium reserved the right to take some of the lots back, then did so later, and the SJC approved the grantor’s retrieval of those lots. The SJC in Queler did not find that the reserved right to change the ownership was repugnant to the original grant, as was unsuccessfully argued by the disaffected party in Skye v. Hession.

Unfortunately, the case of Skye v. Hession deals only with the facts in that case, wherein the owner had also reserved a life estate in the deed. The question that this case seems to keep open is whether, for a reserved special power of appointment to have validity, a life estate is also needed in the deed so that the recipients only receive remainder interests. Where the Court in footnote 7 referred to a recipient’s interest in such a deed as a “present conditional ownership interest,” it seems likely that the same legal result would occur without the life estate in the deed.
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Supreme Judicial Court of Massachusetts Explains How to Properly Interpret Massachusetts Irrevocable Trusts in 2017 Case of Ferri v. Powell-Ferri

April 30, 2017

In Ferri v. Powell-Ferri, 476 Mass. 451 (2017), the Supreme Judicial Court of Massachusetts (“SJC”) had been asked to answer questions of Massachusetts trust law by the Connecticut Supreme Court.  While the Connecticut case was a divorce case, the questions involved how to properly interpret a Massachusetts irrevocable trust under Massachusetts law.  This case is particularly helpful for Massachusetts elder law attorneys who regularly have to confront unreasonable positions on trust interpretation taken by the Office of Medicaid, and later defended in court with further unreasonable positions by the Office of the Attorney General, which is required to defend the agency in appellate court matters.

The lawyers’ briefs can be found at http://ma-appellatecourts.org/search_number.php?dno=SJC-12070&get=Search , and the oral arguments can be seen at http://www.suffolk.edu/sjc/archive/2016/SJC_12070.html.

This decision has lots of helpful info for Massachusetts elder law attorneys sprinkled throughout. Here are some quotes from the case with my comments below:

SJC:  “The interpretation of a written trust is a matter of law to be resolved by the court.”

An agency is entitled to deference on issues of fact, but not on issues of law, so the Office of Medicaid’s trust interpretation claims should not receive any judicial deference. (Unfortunately, some Superior Court judges do not seem to handle their interpretation role appropriately; some merely defer to the agency on all issues, even though trust interpretation is not an issue of fact.

SJC:  “The rules of construction of a contract apply similarly to trusts; where the language of a trust is clear, we look only to that plain language. …In deciding whether there is ambiguity, “the court must first examine the language of the contract by itself, independent of extrinsic evidence concerning the drafting history or the intention of the parties.” … If a court concludes that such ambiguity exists, “[w]hen 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.” “

Trusts must be read as a whole.  If there is any possibility of ambiguity, then extrinsic evidence of intent must be considered.

SJC:  “[E]xtrinsic evidence may be admitted when a contract is ambiguous on its face or as applied to the subject matter.  The initial ambiguity must exist, however. … [E]xtrinsic evidence cannot be used to contradict or change the written terms, but only to remove or to explain the existing uncertainty or ambiguity.”

If the trust has no ambiguity in its terms, it must be honored.  If a Trustee incorrectly administers the trust, that action may not affect the trust’s validity.

SJC:  “In determining the meaning of a contractual provision, the court will prefer an interpretation ‘which gives a reasonable, lawful and effective meaning to all manifestations of intention, rather than one which leaves a part of those manifestations unreasonable, unlawful or [of] no effect'”

A power of the Trustee to distribute principal from an irrevocable income-only trust cannot be imputed based on an isolated view of some of the trust’s terms.  A prohibition against distributing principal cannot be overridden by a mere investment power.

SJC:  “It is one of the fundamental characteristics of trusts that the full and exclusive legal title is vested in the trustee”

The grantor/donor/settlor of the trust does not have legal title to the assets owned by the trust.  Thus, partial control does not allow the grantor/donor/settlor to obtain legal title to the trust’s assets.

SJC:  “The statements in the settlor’s affidavit further support the settlor’s evident intention ….  Because the intent of the settlor is “paramount,” Morse, 466 Mass. at 98, and the settlor’s affidavit evidences the settlor’s intent at the time of execution, the settlor’s affidavit should be considered. … We also cited the Restatement (Third) of Property as further support for the use of postexecution affidavits as affirmative evidence.  See id.; Restatement (Third) of Property:  Wills and Other Donative Transfers § 10.2 & comment g (2003) (“In seeking to determine the donor’s intention, all relevant evidence, whether direct or circumstantial, may be considered, including the text of the donative document and relevant extrinsic evidence”).  See also Loring & Rounds, supra at Introduction (“In the case of an irrevocable inter vivos trust, the settlor’s intentions at the time of funding are what determine its terms.  That having been said, postfunding statements of the settlor might be admissible to clarify what those intentions were” [emphasis in original; footnote omitted]).  Indeed, this court has allowed the reformation of a trust instrument to conform to the settlor’s intent, and has permitted the introduction of an affidavit by the drafter to show that the language of the instrument was inconsistent with the intent of the settlor.  See Walker v. Walker, 433 Mass. 581, 587 (2001).”

An affidavit of intentions by the grantor/donor/settlor of the trust, as well as the lawyer who drafted it, will be respected by the court. Perhaps elder law attorneys should have all of their clients with irrevocable income-only trusts prepare and execute these affidavits now on all major trust issues being raised by the Office of Medicaid.  Perhaps the upcoming decision by the SJC in the Daley and Nadeau cases will change the agency’s overall position about these trusts, but, given the extreme positions and tactics that have been taken by the agency, I am skeptical that anything written by the SJC will stop the Office of Medicaid from taking unreasonable positions against trusts.

 

Update on Daley and Nadeau SJC Cases

April 13, 2017

I’m getting lots of calls and emails about the status of our SJC case, so here’s a quick update.

Given the slim chance of getting the Supreme Judicial Court to take a case on Direct Appellate Review, my co-counsel, Nick Kaltsas, and I were surprised when the Daley case was accepted by the SJC on October 19, 2016.  The Court chose to pull the Nadeau case up from the Massachusetts Appeals Court to be heard along with our case.  The Daley and Nadeau cases were then argued at the Supreme Judicial Court in Boston on January 5, 2017.  The briefs can be found here:  http://www.ma-appellatecourts.org/display_docket.php?dno=SJC-12200 and http://www.ma-appellatecourts.org/display_docket.php?dno=SJC-12205

The SJC has an internal goal of getting decisions out within 130 days of oral argument, so if the Court is on track we may well have a decision by May 15, 2017.

The oral arguments can be seen here: http://www.suffolk.edu/sjc/archive/2017/SJC_12200.html.  What I found troubling about the oral arguments is that we went first and had no opportunity under the Court’s rules to save time for rebuttal.  The Assistant Attorneys General representing the agency, being asked questions that should have been anticipated, and knowing that we wouldn’t have a chance to respond, then started making extreme statements that they didn’t even dare make in their briefs. They had no serious answer to the repeated questions from the SJC justices on how the nursing homes would get paid, so, backed into a corner, they claimed that an irrevocable trust is “no real trust,” that the agency’s interpretation of the 1993 federal Medicaid trust law is not new, and that all trusts allow people to have their cake and eat it too. If you ever harbored the illusion that the Office of the Attorney General cares more about the law than winning a case, I suggest you watch the video.

Hopefully, the SJC will soon put an end to the Office of Medicaid’s flimsy excuses for repeated denials of MassHealth applicants who have legitimate irrevocable trusts.

When Is a Trust Considered “Revocable” under Massachusetts Law, and Is It Unethical for a Governmental Lawyer Representing a State Agency to Misrepresent This Basic Information at a Fair Hearing?

April 3, 2017

Under current law, Massachusetts General Laws, Chapter 203E, Section 602, a trust is presumed to be revocable and amendable “[u]nless the terms of a trust expressly provide that the trust is irrevocable.”  This law is part of the Massachusetts Uniform Trust Code, which took effect on July 8, 2012.  Under Section 64 of the enactment of the Massachusetts Uniform Trust Code, “Subsection (a) of section 602 of chapter 203E of the General Laws shall not apply to trust instruments executed before the effective date of this act.”  Thus, the current presumption that a trust is revocable does not apply to trusts executed before July 8, 2012.  (This presumption and its effective date were elucidated clearly and unambiguously by Courtney J. Maloney, Esq. and Professor Charles E. Rounds, Jr. on pages 27 and 31 in their December 2014 Massachusetts Law Review article entitled The Massachusetts Uniform Trust Code: Context, Content, and Critique.)

Before July 8, 2012, the presumption about a trust was exactly the opposite; a trust was presumed to be irrevocable unless it stated that it was intended to be revocable.  See, for example, Phelps v. State Street Trust Company, 330 Mass. 511 (1953), where the Supreme Judicial Court wrote:  “The law of Massachusetts is plain that a valid trust, once created, cannot be revoked or altered except by the exercise of a reserved power to do so, which must be exercised in strict conformity to its terms.”

Unfortunately, it appears that this law was intentionally or negligently misrepresented at a recent fair hearing by Attorney Katherine M. “Katy” Schelong.  See Appeal 1609134, where the hearing officer ruled that the new presumption of revocability in the law applied to a trust established on July 16, 1999, rendering all of its assets countable.  That is exactly what Schelong’s memorandum had argued, as she had quoted from the new law twice (on pages 1 and 8) but had not bothered to mention its effective date.  Thus, Schelong’s misrepresentation of law was not a minor one, was repeated for effect and had a direct result on the outcome of the case.

There have been hundreds of fair hearings regarding trusts in the past few years, and in many of them Schelong had made all sorts of nonsensical revocability arguments about the trusts she was attacking (see Do the Lawyers Representing the Office of Medicaid in Massachusetts Know What a Revocable Trust Is?), so it is beyond me why an experienced hearing officer would not have known about these presumptions of law.  Perhaps the hearing officer’s lack of basic knowledge about trust law is due to the failure of the Director of the Board of Hearings to provide proper training, as she is required to do under Massachusetts General Laws, Chapter 118E, Section 48.

Still, the failure of the Director of the Board of Hearings to do her job effectively does not mean that a governmental lawyer representing a state agency should feel emboldened to see if she can get away with misstating the law.  It is surprising that this lawyer would not have been shamed into stopping such tactics by her colleagues at the Office of Medicaid and the Office of the Attorney General, so perhaps the misrepresentation problem runs much deeper.

Isn’t It Unethical for a Governmental Lawyer Representing an Agency to Cite a Massachusetts Appeals Court Case for the Exact Opposite of What the Court Held?

March 31, 2017

For years, the Office of Medicaid has not been implementing federal Medicaid trust law correctly, and has stretched for legal arguments to make against irrevocable trusts.  One of those arguments has been that a power to substitute assets (i.e., the power to reacquire trust assets by substituting assets of an equivalent value) is a way for the settlor of the trust to take the assets back, even though such a power is merely an option to purchase the assets at fair market value.  The Agency ignores the fact that purchasing an asset for its fair market value means that the settlor achieves no profit from the transaction; the settlor and the trust merely end up with different assets of the same amount.  In the decision of Heyn v. Director of the Office of Medicaid, 89 Mass. App. Ct. 312 (2016), the Massachusetts Appeals Court confirmed that point and criticized the Office of Medicaid for attempting to treat a power to substitute assets as a reason for treating an irrevocable trust as countable:

Even less persuasive is the hearing officer’s other rationale, which rested on the grantor’s reserved power to direct a transfer of assets out of trust in exchange for other assets of equivalent value. Such an exchange would be equivalent to a sale of trust assets, with the grantor in the role of purchaser and the proceeds of the sale nonetheless retained by the trust as principal. Such a transfer would not effect any distribution or diminution of trust principal, any more than a sale of trust assets to unrelated third parties, followed by a reinvestment of sale proceeds by the trust.

Thus, given all of the fair hearing decisions that had also concluded that the settlor of the trust could not benefit financially from such a power (see https://irrevocabletrust.info/category/fair-hearing-decisions/approval-at-fair-hearing/issue-power-to-substitute-assets/), for many of us it seemed that the issue could fairly be seen as settled.

Unfortunately, and as an Officer of the Court it pains me to be making this point, when we’re dealing with the Office of Medicaid, we may not always be dealing with lawyers who actually care about the law.  In a January 20, 2017 fair hearing memo in MassHealth Appeal 1615211, Attorney Katherine “Katy” Schelong, representing the Agency, cited the Heyn decision for the exact opposite proposition, and, in an act that seems breathtakingly dishonest, she intentionally left out the above quote from the case and claimed that language in Heyn supports the position that a power to substitute assets held by the settlor of the trust is a valid reason for treating an irrevocable trust as countable:

[U]nder Paragraph B of the Second Article, the applicant reserved the personal right, irrespective of the Trustee and its discretion, to reacquire Trust assets by substituting assets of an equivalent value. This is an “any circumstance” under the Irrevocable Trust where the principal is available for the benefit of the applicant, by the applicant herself. 130 CMR 520.023(C)(l)(a). In a Medicaid eligibility determination, it is irrelevant whether the applicant needs to, wants to, or is able to exercise this authority. The fact that under the terms of the Trust such any such option exists renders the principal available and countable, which several Courts have acknowledged: “Under the post-1993 version of the statute, for purposes of determining eligibility for Medicaid benefits, “countable assets” include any portion of the trust principal that could “under any circumstances” be paid “to or for [the] benefit [of]” Roche. 7 Doherty, supra. Such circumstances need not have occurred, or even be imminent, in order for the principal to be treated as “countable assets”; it is enough that the amount could be made available to Roche under any circumstances. See Lebow, supra at 177-178, 740 N.E.2d 978.” Heyn v. Director of the Office of Medicaid, 48 N.E.3d 480, 483-484 (April 15, 2016).

How does an Agency lawyer validly cite Heyn for that point even though the Court completely and unambiguously ruled the exact opposite elsewhere in its opinion? It is as baffling as it is dishonest.

This is the problem that the elder law bar have been having when dealing with some of the Agency’s lawyers. Pseudologists such as Schelong, claiming they are lawyers representing the Agency during the fair hearing process but never actually attending any hearing, advise the MassHealth worker to issue a denial, but then, in an act that seems like only partial or convenient representation, do not advise the worker to give the reasons for the denial. These lawyers claim that their advice to issue the denial is protected by attorney-client privilege, but in actuality the MassHealth workers (who are at the very bottom of the administrative structure) are just doing what they are told to do by the Agency’s lawyers. We elder law attorneys then have to trudge to the fair hearing for no other purpose than to receive the reasons for the denial, because the worker does not provide the reasons for the denial despite our requests. (In what other area of law — other than, perhaps, national security — can it be considered proper for the appellant to not be given the detailed reasons for the legal proceeding until the time scheduled for the proceeding to begin?) The reasons are finally provided at the fair hearing via a lengthy memorandum prepared by the Agency’s lawyer, and often held by the MassHealth representative and kept outside of the appellant’s file.  These memoranda are riddled with quotes such as the above one from Heyn that intentionally take cases out of context.

The complete misrepresentation of the Heyn case, while shocking in its own right, is what Schelong does in her memoranda on a regular basis. Her written works, never to my knowledge submitted to or published in any peer-reviewed journal, are misleading quote-fests, and she tries to hide these memoranda from public consumption by adding a confidentiality notice (as well as the MassHealth applicant’s Social Security number) so that they will be shielded from public records requests. (When I receive any of her memoranda, I post them at https://irrevocabletrust.info/category/fair-hearing-process/masshealth-memo-available/ .)

Note that Schelong and her ilk couldn’t take these steps without explicit or implicit approval from Chief MassHealth Counsel Sharon Boyle.  It seems that, in her office, the ends justify the means. See this  2009 Schelong email to a MassHealth worker, instructing the worker to destroy Schelong’s memorandum that was already in the applicant’s file. The lawyers in the hierarchy above Schelong and Boyle in the Executive Office of Health and Human Services apparently approve of or condone such action, or are blissfully ignorant of this misbehavior. As citizens who pay their salaries, we should expect more integrity from all of them than we seem to be getting.

Contrary to the Independent “Research” of the Office of the Attorney General, the Definition of “Available” Was in MassHealth Regulations from 10/1/1999-12/31/2013

May 15, 2016

In a Suffolk Superior Court case where my client is challenging the Office of Medicaid’s ludicrous legal position that a home in an irrevocable trust is always a countable asset if it is “available” (which to the agency now means you can use it), I pointed out that the definition of that word was removed from the MassHealth regulation at 130 CMR 515.001 on January 1, 2014.  Before then, the word “available” was defined as “a resource that is countable under Title XIX of the Social Security Act.”  To my great dismay, a lawyer from the Office of the Attorney General who is defending the agency’s actions in this case performed her own independent “research” and “reviewed the official regulations” back to 1998 and reported in her brief to the Court that the word “available” was never defined in MassHealth regulations.

Apparently, the lawyer from the Office of the Attorney General was so independent in her research that she never ran her research findings by her actual client.  If she had done so, the Office of Medicaid would probably have been forced to inform her that MassHealth regulatory changes are attached to Eligibility Letters, and that Eligibility Letters dating back to 2002 can be found on the MassHealth part of mass.gov, the official website of the Commonwealth of Massachusetts. Thus, the definition of the word “available” before January 1, 2014 can be easily found online, attached to official MassHealth documents.

Let’s first look at Eligibility Letter 195 in 2010.   On page 6, there is the definition that the Attorney General’s lawyer supposedly was looking for elsewhere but could not find: “Available – a resource that is countable under Title XIX of the Social Security Act.” That definition is on the first page of 515.001. This Eligibility Letter also tells us where to find the last change to the page that this definition is on.  Moving back to page 1 of the Eligibility Letter, under Manual Upkeep, in the Insert column, look for 515.001 (1 of 8); looking across the row, it tells us that the last time that page was changed was in E.L. (Eligibility Letter) 147.

Now let’s look at Eligibility Letter 147 in 2006.   On page 3, there it is again: “Available – a resource that is countable under Title XIX of the Social Security Act.”  On page 2, under Manual Upkeep, in the Insert column, look for 515.001 (1 of 8); looking across the row, it tells us that the last time it was changed was in E.L. (Eligibility Letter) 95.

Now let’s look at Eligibility Letter 95 in 2002.   On page 17, once again, we find the definition that the Office of the Attorney General claims never existed: “Available – a resource that is countable under Title XIX of the Social Security Act.”  On page 2, under Manual Upkeep, in the Insert column, look for 515.001 (1 of 8); looking across the row, it tells us that the last time it was changed was in E.L. (Eligibility Letter) 72, which we cannot find on the MassHealth part of mass.gov, as the Eligibility Letter must have been issued before 2002.

The Plymouth Law Library has assisted me in looking further backwards.  Here is what I was informed via email, with pre-2002 research into whether available was and wasn’t in MassHealth regulations attached to the email:

The method for tracing back regulations used by the Trial Court law libraries is to use the annual cumulative table of changes and then pull the specific Mass. Registers containing the appropriate amendments.  Because Plymouth only has the former CMR pages going back to 2009, I contacted the Hampshire Law Library for assistance.  The staff member determined that the word “available” first appeared in 130 CMR 515.001 as of Oct. 1, 1999.  If you look at the filing sheet under the section called “Summary of Regulation,” it says the Division became aware of the need for revisions pursuant to the Omnibus Budget Reconciliation Act of 1993 so apparently it took the agency several years to realize the necessary changes required under the federal law.

Attached to this email is the filing sheet from Mass. Register 877 and 130 CMR 515.001 (page 771 dated 9/3/99) showing that the word “available” was not included under the list of definitions.  After those three pages is the filing sheet from Mass. Register 879 and 130 CMR 515.001 (page 771 dated 10/1/99) which does include the definition for “available.”

Earlier research by the Plymouth Law Library into the definition of available since 2000 had also shown that the word “available” was defined until the end of 2013.

Why is the definition of “available” in 130 CMR 515.001 important? Because it proves that from October 1, 1999, when the agency first implemented the 1993 federal Medicaid trust law, until January 1, 2014, when the definition disappeared from MassHealth regulations, the official position of the agency was that a home in a trust was available if it was countable. The agency in this case is trying to get away with arguing the exact opposite, that a home in a trust is countable if it is available, and is arguing that the word means something completely different than how it has been interpreted by the agency in the past.

How is it that the research done by the Office of the Attorney General found that the word “available” was never in the “official version of regulations,” while the agency itself has copies of its own official publications on its part of the Massachusetts governmental website, showing the word defined? Why is that the Office of the Attorney General strangely did not confirm its research findings with the agency itself?  It is indeed troubling that the Office of the Attorney General, the highest legal arm of Massachusetts government, cannot be counted on to be thorough in its legal research process.

The Case of Heyn v. Director of the Office of Medicaid Brings Much of Medicaid Trust Law in Massachusetts Back to Reality

April 18, 2016

Since the time that the Massachusetts Appeals Court handed down the decision of Doherty v. Director of the Office of Medicaid, 74 Mass.App.Ct. 439 (2009), lawyers representing the Office of Medicaid have been engaging in distortions of what was actually decided there. In Heyn v. Director of the Office of Medicaid, decided April 15, 2016, the Massachusetts Appeals Court clarified its decision in Doherty, and laid waste to a great deal of the Office of Medicaid’s legal distortions.

Everlenna Roche, the deceased settlor of the trust in question in the Heyn case, had filed a MassHealth application and been denied. A fair hearing was requested, and the Hearing Officer assigned to the case, Thomas J. Goode, ruled in Fair Hearing Decision 1306280 that there were circumstances where the assets of the trust could be made available to her.  On appeal to the Superior Court under Massachusetts General Laws, Chapter 30A, Judge William F. Sullivan upheld the hearing decision. In Heyn, the Massachusetts Appeals Court reversed those decisions and approved the trust and the MassHealth application.

Judge Sullivan and Hearing Officer Goode are emblematic of the frustrations that many Massachusetts elder law attorneys have had in recent years with MassHealth applications and appeals involving trusts, as their decisions have been inconsistent. A mere six days before affirming the decision in Fair Hearing Decision 1306280, Judge Sullivan had taken the exact opposite position in approving a similar trust in the Superior Court appeal of O’Leary v. Thorn, a case that was not appealed afterwards by the Office of Medicaid. Hearing Officer Goode, who had been the hearing officer in Fair Hearing Decision 0608458 (which was the fair hearing decision underlying the Doherty case), for years had apparently not seen an irrevocable trust he didn’t disapprove of, with his buying into the Office of Medicaid’s unsupportable claim that federal Medicaid trust law created a presumption that trusts were countable assets, then suddenly on December 4, 2014 reversed course in Fair Hearing Decision 1404746, and later issued Fair Hearing Decision 1509625, becoming a staunch intellectual critic of many of the anti-trust positions taken by the lawyers at the Office of Medicaid. Unfortunately, because of the inconsistent decisions rendered by them, as well as by other fair hearing officers and Superior Court judges, Massachusetts elder law attorneys had been left with uncertainty on the outcome of any case involving a trust.

The Heyn case should bring a great deal of logic and law back to the MassHealth application and appeal processes. In Heyn, the Massachusetts Appeals Court reviewed an irrevocable income-only trust and found it to be acceptable under federal Medicaid trust law. Several arguments against the trust had been raised by the Office of Medicaid at the fair hearing, and they were shot down by the court. Let’s review these issues not in order of importance, but rather in the order in which they present themselves in the Court’s opinion:

(1) In the “Background” provided by the Court, it is specifically stated that the trust owned “her former residence, held by the trust.”  Where the hearing officer had specifically rejected the arguments of the Office of Medicaid regarding the home being “available” under 130 CMR 520.023(C)(1)(d), perhaps the Office of Medicaid now may be estopped from continuing to raise that issue, which is not in accordance with law anyway; see Is a Home That Is Owned by an Irrevocable Trust Automatically a Countable Asset under Federal Medicaid Trust Law?

(2) The Doherty case was about a particular trust, and did not change Massachusetts Medicaid trust law. The Massachusetts Appeals Court specifically stated in its decision that “it is settled that, properly structured, such trusts may be used to place assets beyond the settlor’s reach and without adverse effect on the settlor’s Medicaid eligibility.”

(3) Under the 1993 federal Medicaid trust law, “countable assets” include any portion of the trust principal that could “under any circumstances” be paid to or for the benefit of the settlor of the trust.  The proper standard of review is “assessing whether the trust would allow distribution of principal.”

(4) The trustee had the power to make distributions of assets from the trust to persons other than the settlor, and the Court had no problem with that power and did not even choose to comment on it specifically.  The Court did implicitly render a comment in another context that “a provision making trust principal available to persons other than the grantor does not by its nature make it available to the grantor.” Thus, a provision in an irrevocable income-only trust that allows distributions to persons other than the settlor or the settlor’s spouse has been approved by the Massachusetts Appeals Court.

(5) The settlor had reserved a special or limited power of appointment, the “power, exercisable at any time or from time to time, by written instrument during the Grantor’s lifetime or by the Grantor’s will or any codicil thereto, to appoint any part or all of the principal or income of this Trust to any one or more of the Grantor’s issue.” The Court had no problem with that power, concluding that “a provision making trust principal available to persons other than the grantor does not by its nature make it available to the grantor, any more than if the grantor had gifted the same property to such a person when she created the trust, rather than placing it in trust.”  Thus, a provision in an irrevocable trust wherein the settlor reserves a special or limited power of appointment, exercisable either during lifetime or by will, has been approved by the Massachusetts Appeals Court.

(6)  The hearing officer had concluded that the irrevocable trust was countable because there was a possibility that the recipients of assets from the trust could return those assets to or use them for the settlor.  The Court shot down that type of analysis, because “for purposes of computing countable assets, Medicaid does not consider assets held by other family members who might, by reason of love but without legal obligation, voluntarily contribute monies toward the grantor’s support.” Thus, the Office of Medicaid is precluded from presuming collusive activities between the settlor and other trust beneficiaries, and is limited to a one-step analysis when reviewing any trust provision.

(7) The trustee had the power to make allocations between principal and income.  The Court had no problem with that power because the trustee’s authority was constrained by “reasonable accounting principles and practice and state law.” Thus, the argument often made by lawyers at the Office of Medicaid that state law doesn’t matter in reviewing a trust under Medicaid law was eviscerated.

(8) The settlor had reserved a so-called power of substitution, entitling the settlor to require the trustee to “transfer any trust assets in exchange for assets of equivalent value,” exercisable by the settlor “solely in a nonfiduciary capacity.” The Court had absolutely no problem with that power, concluding that “[s]uch an exchange would be equivalent to a sale of trust assets, with the grantor in the role of purchaser and the proceeds of the sale nonetheless retained by the trust as principal. Such a transfer would not effect any distribution or diminution of trust principal, any more than a sale of trust assets to unrelated third parties, followed by a reinvestment of sale proceeds by the trust.” Thus, a power of substitution is viewed by the Massachusetts Appeals Court as an option to purchase at fair market value, not a prohibited power to receive assets from the trust.

(9) Central to the case was that the Office of Medicaid had argued, and the Hearing Officer and Superior Court judge had concluded, that the trustee could purchase an annuity, and treat all of the payments, including the return of principal, as income distributable to the settlor. The Court confirmed the major points made in Potential Annuity Purchases by the Trustee Do Not Provide the Settlor of an Income-Only Irrevocable Trust with Access to Principal. The Court shot down the Office of Medicaid’s annuity argument, stating that “the allocation of annuity payments as between principal and income is governed by G. L. c. 203D, § 18(a), which creates a statutory presumption that any amount received by the trust, not expressly characterized as dividend or interest income, shall be allocated to principal.” The Court re-emphasized the point by stating that “[t]he income portion available for distribution in such circumstances would be no different in character than interest earned on a certificate of deposit, dividends from stocks purchased and held by the trust, or other income earned on any trust assets.” Further, this conclusion by the Massachusetts Appeals Court was made by utilizing Massachusetts law, further eviscerating the argument often made by lawyers at the Office of Medicaid that state law doesn’t matter in reviewing a trust under Medicaid law.

(10) The Court appears to have concluded its decision by attempting to minimize the continued usage of the Doherty case as a reason for issuing denials in MassHealth applications involving irrevocable trusts, as the Court explained Doherty: “[P]ursuant to the terms of the trust there are no circumstances under which the trustee may distribute trust principal to Roche. The case is in that respect in contrast to Doherty, supra, in which Art. XXII of the trust expressly authorized the trustee “in its sole discretion” and notwithstanding “anything contained in this Trust Agreement” to the contrary, to “pay over and distribute the entire principal of [the] Trust fund to the beneficiaries thereof [including the Medicaid applicant], free of all trusts.””  Thus, the Massachusetts Appeals Court clarified the narrow rationale for its decision in Doherty, and highlighted that, for the trust’s assets to be deemed countable assets, there must be a direct path of the trust assets from the trust to the settlor.

(11) In footnote 10, the Court includes the following quote from the trust:  “The Grantor intends that this trust be a grantor trust for federal income tax purposes and all provisions of this trust shall be construed so as to effectuate this intent.” Thus, where the Massachusetts Appeals Court did not otherwise mention this provision in its decision, the Court has implicitly approved it, so the intention that an irrevocable trust be a grantor trust for federal income tax purposes is legally a non-issue when reviewing an irrevocable trust for Medicaid purposes.

Until we actually see how the lawyers representing the Office of Medicaid react to the Heyn decision, optimism should be temporarily tempered, but the Massachusetts Appeals Court appears to have left them little room for continued distortions about the Doherty case and how to apply federal Medicaid trust law when reviewing irrevocable trusts.

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