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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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