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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 2009-2017 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.

When Can the Trustee of a Revocable Trust in Massachusetts Make Distributions to the Beneficiaries without Incurring Personal Liability to the Deceased Settlor’s Creditors?

October 13, 2017

An impatient trust beneficiary is one of my cases began demanding distributions from the decedent’s revocable trust within a month of the settlor’s death. The Trustee has no problem making the earliest possible distributions, as long as the Trustee can have no personal liability for doing so. Other than unpaid income tax liabilities of the decedent, the only major problem that should be of concern to the Trustee could be a lawsuit against the trust by one of the decedent’s creditors.  Thus, the question is when, under current Massachusetts law, can a Trustee end up being personally liable to then-unknown creditors after making distributions to the beneficiaries of the trust.

The Massachusetts Uniform Trust Code (“MUTC”), which took effect in 2012, allows creditor claims against revocable trusts; see (a)(3) in Massachusetts General Laws, Chapter 203E, Section 505. The MUTC is otherwise silent about what that means.  The Massachusetts Uniform Probate Code, at Massachusetts General Laws, Chapter 190B, Section 3-803, states in (a) that creditors are out of luck unless they file a lawsuit against an estate within one year of the decedent’s death; and states in (b) that a Trustee is treated the same as the estate’s Personal Representative. Thus, a revocable trust is treated the same as an estate, which has a period for creditor claims of one year after the decedent’s death, and the Trustee of a revocable trust therefore can, without being liable to unknown creditors, safely make distributions twelve months and a day after the settlor’s death. Note, however, that this analysis applies only to normal creditors, not the decedent’s unpaid income tax liabilities, for which the Trustee would remain personally liable.

Must Both Spouses Always Cooperate When There Is a MassHealth Application for One of Them?

October 4, 2017

Under Massachusetts law, it is clear that spouses are financially responsible for each other’s necessaries, which would include nursing home care. Under Massachusetts General Laws, Chapter 209, Section 1, “both spouses shall be liable jointly or severally for debts incurred on account of necessaries furnished to either spouse.” In fact, one wife found out the hard way when she applied for MassHealth too late for her husband and wound up getting successfully sued by the nursing home for the $45,243.24 that was still owed for her husband’s care; see Are You Personally Responsible for Your Spouse’s Nursing Home Bills in Massachusetts?

When the community (i.e., at home) spouse cooperates with a timely MassHealth application, the community spouse has financial options to preserve assets and income.  One such option (although it should never be the first and only choice that is considered) is the purchase of a single-premium, irrevocable, nonassignable annuity with excess assets (i.e., those assets — other than the principal residence — in excess of the community spouse resource allowance, which is currently $120,900.00 during 2017).

Cooperation with the institutionalized spouse’s MassHealth application is not always in the best interests of the community spouse. What if the community spouse had maintained separate assets from the institutionalized spouse under a prenuptial agreement?  What if the spouses had been legally separated but had not ever filed for divorce?  What if the community spouse does not want to buy an annuity for financial or health reasons?  What if the community spouse has made recent gifts or established a trust and wants to prevent those matters from being considered for the institutionalized spouse’s MassHealth application?  Fortunately for those community  spouses, a process known as “spousal refusal” is an option for a community spouse who does not want to cooperate with the MassHealth application.

There have been nine fair hearing decisions that I have recently found at the Massachusetts Office of Medicaid’s Board of Hearings on the issue of spousal refusal: Appeal 0307174Appeal 0402108Appeal 0607185Appeal 0711322Appeal 1007332Appeal 1216920Appeal 1412045Appeal 1600586 and Appeal 1601683.  Based on a thorough review of those fair hearing decisions and the current MassHealth regulation at 130 CMR 517.011, it appears that the community spouse must put into writing the refusal to cooperate, then, if the institutionalized spouse is not proved to be incompetent, an assignment by the institutionalized spouse must be made of spousal support rights to the MassHealth agency, which under Massachusetts General Laws, Chapter 118E, Section 1 is the Executive Office of Health and Human Services.  At that point, the community spouse’s assets and income are not considered as part of the application.

Spousal refusal is authorized by federal Medicaid law at 42 U.S.C. s. 1396r-5(c)(3), and is done throughout the nation. The risk of spousal refusal is that the state Medicaid agency could file a lawsuit against the community spouse for support of the institutionalized spouse (and the community spouse then could end up in a much worse position than if an immediate annuity had been purchased), but to my knowledge such a lawsuit has never occurred anywhere.

In the 2017 Case of Daley v. Secretary of the Executive Office of Health and Human Services, the Supreme Judicial Court of Massachusetts Rules That a Home May Be Effectively Deeded to an Irrevocable Trust under Federal Medicaid Law

September 27, 2017

On May 30, 2017, the Supreme Judicial Court of Massachusetts (“SJC”) issued its opinion in the case of Mary E. Daley v. Secretary of the Executive Office of Health and Human Services, 477 Mass. 188 (2017).  We filed a petition for rehearing (which is essentially a motion for reconsideration) on some of the language in the opinion, and the Office of the Attorney General issued a weak response, but unfortunately the Court chose to let every word of its opinion stand.

The basic part of the decision was easy for the Court. The Court ruled that a person’s home in an irrevocable trust must be treated the same as any other asset.  According to the Court, the right to live in the home does not cause the principal of the trust to be a countable asset for MassHealth purposes, and is merely the equivalent of having the right to the income generated from renting it out.

The Court sidestepped the issue as to whether it is problematic to have a right to be reimbursed from trust principal for taxes that under federal income tax law had rebounded from the trust back to the settlor’s personal tax returns.  Under federal income tax law, a trust can be irrevocable yet have certain sentences that cause the income and capital gains of the trust to be taxable not to the trust, but rather to the settlor. This type of trust, known for many decades by the IRS and tax practitioners as a grantor trust, but embarrassingly referred to by the SJC twice in its opinion as a “grantors trust,” is commonly drafted for Medicaid planning purposes. The SJC remanded this tax issue (which, even though we had briefed it, had not been decided below) back to the agency for its consideration, which essentially means further litigation.

The Court had on its own initiative consolidated our Daley case with the Nadeau case, and in Nadeau the Court commented on something that had gone unmentioned by the agency in its briefs at the fair hearing, in Superior Court and at the SJC.  It is indeed an oddity for any court to comment on an unmentioned and unbriefed issue without requesting briefs, and it is a travesty when the court blurts out something ignorantly. Here, the Court noticed a provision in the Nadeau trust known as a power of appointment, and the power allowed gifts to be made to nonprofit organizations.  The Court then “reasoned” that this power to make gifts could possibly be used to make payment of the powerholder’s nursing home bills whenever staying in a nursing home that is run as a nonprofit organization.  In this dicta, the court did not even bother to try explaining how having a power to make a gift could equate with having the gift applied to your debt, especially where the recipient of the gift would have to act collusively and in violation of fiduciary duties for the gift to be applied to the debt.  The petition for rehearing accurately spelled out the longstanding law about powers of appointment, but the court chose not to edit its written decision, even leaving in its new phrase “grantors trust” as an embarrassment for the ages.

As could be expected from the Office of Medicaid’s recent antics, the agency is already misstating what the SJC’s decision said, so the litigation over irrevocable trusts will continue in Massachusetts. Anybody who already has an irrevocable trust should immediately have it reviewed by an elder law attorney in light of this new SJC decision, and any trust (or deed) that mentions non-profit organizations, tax reimbursement or the right to use and occupancy of the home may need to be changed.

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.

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.

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