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The Spousal Testamentary Trust Exception Exists in Medicaid Trust Law Because Congress Wanted States to Be Able to Implement Debtor-Creditor Law

May 18, 2014

When the federal Medicaid trust laws were changed in 1985, Congress was, for the first time, simply allowing state Medicaid programs to be treated the same as creditors under state laws. So that trustees of irrevocable trusts could no longer hide behind a spendthrift clause or a thin veil of language protecting the principal of an irrevocable trust from being treated as a countable asset, Congress changed the definition of trusts. In so doing, Congress defined the type of trusts it was trying to affect; those trusts that were self-settled and those that a spouse set up during lifetime for the other spouse were targeted by the federal law. State debtor-creditor laws could not easily be applied to trusts established in a decedent’s will, and that is why the spousal testamentary trust exception ended up in the federal Medicaid law. Certain trusts established by a spouse “other than by will” can be considered countable assets, yet testamentary trusts established for the benefit of the surviving spouse are exempted from consideration. See 42 U.S.C. 1396p(d)(2)(A).

The Commonwealth of Massachusetts was required to place the spousal testamentary trust exception in place as part of its implementation of federal Medicaid trust law, and has done so. Under 130 CMR 520.022(B)(1), which deals with “Trusts or Similar Legal Devices Created before August 11, 1993” a so-called Medicaid Qualifying Trust is defined in the following manner: “A Medicaid qualifying trust is a revocable or irrevocable trust or similar legal device, created or funded by the individual or spouse, other than by a will.” (emphasis added) Further, 130 CMR 520.022(B)(1), which deals with “Trusts or Similar Legal Devices Created on or after August 11, 1993” states: “The trust and transfer rules at 42 U.S.C. 1396p apply to trusts or similar legal devices created on or after August 11, 1993, that are created or funded other than by a will.” (emphasis added)

If Congress had been attempting in 1985 and 1993 to eliminate the usage of all trusts to qualify for Medicaid, as the Office of Medicaid argues, and not just allowing state debtor-creditor laws to be implemented, then there would have been no reason for Congress to define trusts in such a way as to allow the spousal testamentary trust exception. 

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