Income-only Irrevocable Trusts Are Allowed under Federal Medicaid Laws, MassHealth Regulations and Massachusetts Case Law

The memorandum of the Office of Medicaid that is typically filed at fair hearings in MassHealth trust denial cases suggests that all trusts are disallowed, but there is no federal Medicaid law that states that all irrevocable trusts are disallowed; rather, only irrevocable trusts that have certain characteristics are disallowed. The Office of Medicaid contends that courts disfavor the use of irrevocable trusts by Medicaid applicants, yet the Supreme Judicial Court has specifically recognized the viability of so-called income-only trusts where the trustee has no “peppercorn of discretion” to distribute principal to a beneficiary. Cohen v. Comm’r of the Div. of Med. Assistance, 423 Mass 399, 413 (1996). It was the role of the federal government, when it passed federal Medicaid law, to determine what is allowable or not allowable in the trust realm, and the federal government has passed no blanket prohibition against trusts. The Office of Medicaid appears to intentionally misinterpret important cases as well as provisions of the irrevocable trust under attack in a disingenuous attempt to argue that the Settlor of the trust has access to the principal of the irrevocable trust.

In Guerriero v. Commissioner of the Division of Medical Assistance, 433 Mass. 628, 635 (2001), the Court pointed out: “Although we concluded in Cohen the limitations on discretion should be disregarded, we noted that “[i]t is true that a trust might be written to deprive the trustee of any discretion (for instance allowing the payment only of income) and that such a limitation would be respected.” Cohen at 418. In Doherty v. Commissioner, 74 Mass. App. Ct. 439, 442-43 (2009), the Court repeats that point: “[W]e take this opportunity to stress that we have no doubt that self-settled, irrevocable trusts may, if so structured, so insulate trust assets that those assets will be deemed unavailable.” Not so coincidentally, the Office of Medicaid’s memorandum, so full of misleading quotes from cases, usually fails to mention or analyze these points.

The Third Circuit Court of Appeals has already examined Medicaid trust laws and concluded that “there is no reason to believe [Congress] abrogated States’ general laws of trusts. … It relied and continues to rely on state laws governing such issues.” Lewis v. Alexander, 685 F.3d 325, 347 (3d Cir. 2012). (Note that the Office of Medicaid’s misleading memorandum, so full of quotes, never seems to include this quote.) Federal Medicaid law at 42 USC 1396p(d)(2)(C) specifies only four narrow aspects of state trust law that may be ignored in determining eligibility.

The first trust prohibition in federal Medicaid law is that the purpose of the trust may not be used to restrict the exercise of a power granted by the trust instrument to the trustee. If the language of the trust instrument gives to the trustee power to distribute principal to the Settlor of the trust, then it may not be successfully argued that the purpose of the trust was to protect the trust principal from countability for Medicaid eligibility purposes and so the principal is protected. If, however, the trust instrument contains a general prohibition against distribution of principal to the Settlor, then state trust law must be respected.

The second trust prohibition in federal Medicaid law is that any discretion of the trustees is deemed exercised. If the trustees do not have discretion to distribute principal directly to the Settlor, then the principal of the trust is not a countable asset. The third trust prohibition in federal Medicaid law is similar to the second one in that any restrictions on when or whether distributions may be made from the trust to the Settlor may be ignored. If the trustee is given present or future discretion to distribute principal to the Settlor, any restriction on the exercise of that power, such as the provisions in the trusts in the Cohen case, may be ignored in the Medicaid context. The Office of Medicaid is required to recognize that, under the terms of an irrevocable trust, there may be no lawful way for the trustee to make a distribution of principal to the Settlor; the federal Medicaid trust law does not allow the Office of Medicaid to ignore the trustee’s fiduciary duties to the remainderpersons. The court in Doherty said it clearly: “[W]e have no doubt that self-settled, irrevocable trusts may, if so structured, so insulate trust assets that those assets will be deemed unavailable to the settlor.” Doherty at 442-443.

The fourth trust prohibition in federal Medicaid law is that any restrictions on the use of distributions from the trust maybe ignored in the Medicaid eligibility context, but, of course, not even a trustee may control trust property once it is distributed into the hands of the beneficiary as his or her own property.