History of Medicaid Trust Law Reflects That Debtor-Creditor Analysis Is the Proper Standard of Review for Self-Settled Irrevocable Trusts

Before 1985, a Settlor could place the Settlor’s assets in trust for the Settlor, and grant the trustee complete discretion to distribute principal back to the Settlor. For some reason, the assets held in that type of trust were not counted as assets of the Medicaid applicant before 1985. Such a trust, however, would not have been effective against a creditor under state debtor-creditor laws. To eliminate this obvious loophole in the law, Congress changed federal Medicaid law to allow states to implement their existing debtor-creditor laws against that type of trust.

The Iowa case of Strand v. Rasmussen, 648 N.W.2d 95, 101 (2002) is mentioned by the Office of Medicaid, primarily to utilize a quote from it in a misleading manner. A more full reading from this case explains the evolution of Medicaid trust law: “Prior to 1986, an irrevocable trust was not considered to be an asset in determining whether an applicant was sufficiently needy to qualify for Medicaid benefits. … Yet, Congress and the states participating in the joint federal-state Medicaid program began to realize that many individuals with irrevocable trusts that otherwise would have made them ineligible for public assistance were receiving Medicaid benefits. They learned that many individuals confronted with escalating health care expenses and a corresponding depletion of personal assets were taking advantage of the trust gap in the Medicaid act by establishing trust funds to shield their own assets, commonly referred to as “self-settled trusts.” Cohen v. Comm’r of Div. of Med. Assistance, 423 Mass. 399, 668 N.E.2d 769, 771 (1996). As a result, these individuals were permitted “to have [their] cake and eat it too,” at the expense of those who were truly unable to financially care for themselves. Id. at 772; see Lebow v. Comm’r of Div. of Med. Assistance, 433 Mass. 171, 740 N.E.2d 978, 980 (2001) (referencing espoused purpose of 1986 federal Medicaid amendments, as stated by the founding members of the bill, to stop “`affluent individuals … [from] diverting scarce Federal and State resources from low-income elderly and disabled individuals'” (emphasis added) (citation omitted)); Allen v. Wessman, 542 N.W.2d 748, 753-54 (N.D.1996) (discussing overriding purpose of the Medicaid amendments). … In 1986, Congress attempted to close the “loophole” in the federal Medicaid act by promulgating provisions prohibiting individuals with considerable means from utilizing the law of trusts to secure eligibility for public welfare benefits. Lebow, 740 N.E.2d at 980; Cohen, 668 N.E.2d at 772; Cook v. Dep’t of Soc. Servs., 225 Mich.App. 318, 570 N.W.2d 684, 685 (1997); Ronney, 532 N.W.2d at 913-14; Allen, 542 N.W.2d at 754; 570 N.W.2d at 685; see Ramey v. Reinertson, 268 F.3d 955, 961 (10th Cir. 2001). The amendment created an exception to general trust law by including certain trusts with an individual’s assets for the purpose of determining whether an applicant’s resource level exceeded the maximum limits. Cook, 570 N.W.2d at 685; Ronney, 532 N.W.2d at 912. These prohibitive trusts were called Medicaid qualifying trusts.” As you can see, the quotes in this case apply to self-settled irrevocable trusts where there were explicit provisions whereby principal could always have been distributed to the Settlor.

The 2001 Connecticut case of Skindzier v. Commissioner of Social Services also explained the evolution of the availability of principal under federal Medicaid trust law: “Prior to 1986 …the ‘availability’ requirement of 42 U.S.C. § 1396a (a)(17)(B) provided a loophole by which individuals anticipating the need for expensive long-term nursing facility care could impoverish themselves and qualify for medicaid assistance while preserving their resources for their heirs. An individual could establish an irrevocable trust that permitted, but did not require, the trustee to disburse the income, but not the principal, of the trust to the individual. The trustee would pay the income from the trust to the grantor until the medicaid transfer ‘look back period’ had expired and the grantor’s transfer of assets to the trust, therefore, would no longer affect his eligibility for medicaid benefits. Thereafter, the trustee would exercise his discretion to withhold payments of trust income from the grantor. As a result, neither the trust principal nor the trust income would be resources ‘available’ to the grantor within the meaning of § 1396a (a)(17)(B), and the grantor would qualify for medicaid assistance. See H.R. Rep. No. 99-265, pt. 1, pp. 71-72 (1985)․Congress, however, tightened the ‘availability’ loophole provided by § 1396a (a)(17)(B) of the medicaid act by enacting the medicaid qualifying trust provisions set forth at 42 U.S.C. § 1396a (k) (1988). See H.R. Rep. No. 99-265, pt. 1, pp. 71-72 (1985)․ ‘[A] “medicaid  qualifying trust” is a trust established (other than by will) by an individual under which the individual may be the beneficiary of all or part of the payments from the trust and the distribution of such payments is determined by one or more trustees who are permitted to exercise any discretion with respect to the distribution to the individual.’  42 U.S.C. § 1396a (k)(2) (1988). The amount of a medicaid qualifying trust considered ‘available’ to an applicant for purposes of determining eligibility for medicaid benefits ‘is the maximum amount of payments that may be permitted under the terms of the trust to be distributed to the grantor, assuming the full exercise of discretion by the trustee or trustees for the distribution of the maximum amount to the grantor.  ․’ ․ 42 U.S.C. § 1396a (k)(1) (1988)․ Thus, pursuant to § 1396a (k)(1), all possible distributions that a medicaid applicant is capable of receiving from a trust (i.e., trust assets that actually are distributed to the grantor and trust assets that could be, but are not, distributed to the grantor) are considered in determining eligibility for medicaid benefits.”  (Citations omitted;  emphasis in original.)  Ahern v. Thomas, 248 Conn. 708, 713-17, 733 A.2d 756 (1999). The provisions set forth at 42 U.S.C. § 1396p (d), governing treatment of trust assets, “were enacted in 1993 in an effort to further tighten the ‘availability’ loophole of 42 U.S.C. § 1396a (a)(17).”  Id., at 720, 733 A.2d 756.   Section 1396p (d)(3)(A)(i), pertaining to revocable trusts, provides that “the corpus of the trust shall be considered resources available to the individual․” See also Uniform Policy Manual, supra, § 3028.11(B). Section 1396p (d)(3)(B)(ii), pertaining to irrevocable  trusts, provides in relevant part that “any portion of the trust from which no payment could under any circumstances be made to the individual shall be considered, as of the date of establishment of the trust to be assets disposed by the individual for purposes of subsection (c)․” … Section 1396p (d) applies to trusts established after August 11, 1993.   See Ahern v. Thomas, supra, 248 Conn. at 721, 733 A.2d 756.   It does not, however, apply to trusts established by will.  See 42 U.S.C. § 1396p (d)(2)(A) (subsection [d] applies to trust established “other than by will”).”

As explained in the Strand and Skindzier cases, the federal Medicaid trust laws since 1985 have simply allowed Massachusetts to implement its existing debtor-creditor laws against trusts. The Massachusetts debtor-creditor laws had been established under Merchants Nat’l Bank v. Morrissey, 329 Mass. 601 (1953), which held that under Massachusetts law, where the settlor is also the beneficiary of a self-settled trust, the settlor cannot keep property beyond reach of creditors by placing it in a spendthrift trust for the settlor’s own benefit. Also see Ware v. Gulda, 331 Mass. 68 (1954), where the Court stated: “The rule we apply is found in Restatement: Trusts, Section 156 (2): “Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.”.” Note that this language is similar to the language in the federal laws regulating trusts in the Medicaid context.

The countability of irrevocable trusts for Medicaid purposes is governed by 42 U.S.C. §1396(p)(D)(3)(B), which states: “(i) 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, (I) to or for the benefit of the individual shall be considered income of the individual, and (II) for all other purposes shall be considered a transfer of assets by the individual subject to a look back period.” Massachusetts was required to put that federal law into effect, and did so via the regulation at 130 CMR 520.023(C)(1)(C)(a), which states: “In the case of a self-settled trust… 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.”

The Supreme Judicial Court in Cohen v. Commissioner of the Division of Medical Assistance, 423 Mass. 299 (1996), examined these laws, decided that the federal statute should be strictly construed, and took the position that “any circumstances” as outlined in the statute should mean that the “maximum amount capable of distribution under a trust is deemed to be an available resource of the beneficiary, regardless of whether the trustee actually exercises his or her discretion” to distribute funds. The trusts in question in Cohen and its companion cases had been so-called “trigger” trusts, which allowed the trustee to pay principal to or for the benefit of the Medicaid applicant but had that discretion terminated upon an event such as institutionalization.

What the Cohen holding means is that MassHealth stands in the same shoes as a creditor of the Settlor. The Settlor of a trust could not establish an irrevocable trust that allowed distributions to the Settlor but not a particular creditor; the creditor could sue the self-settled trust and reach the maximum amount capable of distribution to the Settlor. If a creditor could successfully sue the trust for a debt of the Settlor and get at the Settlor’s interest, then those are the “circumstances” under which an irrevocable trust would be treated as a countable asset under federal Medicaid law.

In Lebow v. Commissioner of the Division of Medical Assistance, 433 Mass. App. Ct. 171 (2001), the person who was trustee of the trust was also a beneficiary, and the Settlor was always a beneficiary. The trustee had the ability to pay principal back to the Settlor as long as he gave his consent as a beneficiary. Thus, the same person was wearing two hats, and the trust in that case was struck down, where there was no apparent intention to restrict principal distributions to the Settlor.

In Cohen and its companion cases, and in Lebow, the principal was explicitly available for distribution to the Settlor, and there was a thin veil of language protecting the principal so that it arguably was not distributable if Medicaid was desired. None of the trusts in Cohen or Lebow could not have passed muster under a debtor-creditor analysis; a creditor of the Settlor could always have reached the assets of these self-settled trusts. The trustee in those cases could always make distributions of principal to the Settlor, yet the thin veil of language allowed the trustee to attempt to claim later on that the discretion was no longer there; that is why the courts issued dicta along the lines of “having your cake and eating it too.”

The memorandum of the Office of Medicaid usually puts the reader through extreme mental gymnastics to claim the principal of the irrevocable trust is available to the Settlor, yet the case law under Cohen and Lebow was simply about principal distributions that could have unquestionably been made by the trustee to the Settlor or to the Settlor’s creditors without breaching any duty to the remainderpersons.