What Were the Specific Medicaid Problems with the Irrevocable Trusts in the Cohen, Lebow and Doherty Cases?

As previously noted on this blog, many irrevocable trusts in Massachusetts are now under wrongful attack during the MassHealth application process by the Office of Medicaid. A misleading “confidential” memorandum prepared by Ms. Schelong, a lawyer representing the Office of Medicaid is introduced into the record at a fair hearing by the MassHealth eligibility worker. The memorandum attacks specific provisions of the irrevocable trust, but the arguments of the Office of Medicaid usually reflect an intentional misinterpretation, based largely on dicta, of Massachusetts trust law. The misleading memorandum is full of dicta (yet very little analysis) from cases that it could easily lead a hearing officer to believe that there are many cases to consider, but there really are only three Massachusetts cases of note: Cohen v. Comm’r of the Div. of Med. Assistance, 423 Mass 399 (1996), Lebow v. Comm’r of Div. of Med. Assistance, 433 Mass. 171 (2001) and Doherty v. Commissioner, 74 Mass. App. Ct. 439 (2009). This article will address the details of those three cases.

In Cohen and its companion cases, Comins, Walker and Kokoska, the trustee had the authority to distribute principal to the Settlor, but there were limited restrictions on the trustee’s authority. “In each of these cases [the four cases decided under Cohen], the grantor of an irrevocable trust, of which the grantor (or spouse) is a beneficiary and to which the grantor has transferred substantial assets, claims eligibility for Medicaid assistance because the trust, while according the trustee substantial discretion in a number of respects, explicitly seeks to deny the trustee any discretion to make any sums available to the grantor if [emphasis added] such availability would render the grantor ineligible for public assistance. Thus, all these trusts seek to limit the trustees’ discretion just insofar as the exercise of that discretion may make the grantor ineligible for public assistance.” Cohen at 407.

Cohen and its three companion cases stand for disqualifying a trust when the trustee’s ability to pay income and/or principal to or for the benefit of the Settlor terminates upon a specified event or may arise under certain circumstances. In Cohen, for example, a clear provision existed in the trust for distribution of principal or income; thus, there was in the trustee “under the terms of the trust the discretion to pay to the beneficiary the full amount in the trust.” Cohen at 416.

To be more specific, the offending language in the case of Cohen was:

“The Trustees may, from time to time and at any time, distribute to or expend for the benefit of the beneficiary, so much of the principal and current or accumulated net income as the Trustees may in their sole discretion, determine…. The Trustees, however, shall have no authority whatsoever to make any payments to or for the benefit of any Beneficiary hereunder when the making of such payments shall result in the Beneficiary losing her eligibility for any public assistance or entitlement program of any kind whatever. It is the specific intent of the Grantor hereof that this Trust be used to supplement all such public assistance or entitlement programs and not defeat or destroy their availability to any beneficiary hereunder.” Cohen at 415.

In the case of Comins, the offending language was:

“(c) Principal with respect to Settlor. Until the later to occur of (1) the passage of thirty months from the date of the establishment of this trust and (2) the date upon which either beneficiary is first institutionalized, and also thereafter during any periods of time during which the first beneficiary to be institutionalized is not then institutionalized, the Trustee shall apply on behalf of such first beneficiary so much of the principal of the Trust as is necessary and appropriate to provide him/her with those benefits and services, and only those benefits and services, which are not otherwise available to him/her from other sources as or when needed for his/her welfare.
“(d) Withdrawal of Principal. The Trustee shall also pay over or apply for the benefit of each primary Beneficiary an amount of principal as either primary Beneficiary shall direct in writing, not exceeding the lesser of $5,000 or 5% of the principal … provided, however, that the Trustee shall make no distributions of principal under this paragraph to a primary Beneficiary during or with respect to any time during which such primary beneficiary is institutionalized….” Cohen at 417.

In the case of Walker, the offending language was:

“The Trustee is prohibited from spending sums of interest or principal to [Walker] for her benefit for services which are otherwise available under any public entitlement program of the United States of America, the Commonwealth of Massachusetts, or any political subdivision thereof. The exercise of a discretionary power to make a distribution for [Walker’s] health care, which would result in trust assets being used in substitution of public entitlement benefits is a breach of the fiduciary duties imposed on the Trustees [sic] under this indenture.”

In the case of Kokoska, the offending language read:

“The Trustee … may make payment from time to time of so much of the principal of the Trust as is advisable in the discretion of the Trustee to meet the needs of the Primary Beneficiary as set forth in article two.”

In the case of Lebow, the trustee had the authority to distribute principal to the Settlor, but the person who was trustee, wearing his other hat as beneficiary, needed to consent before the trustee could do so. He initially granted his blanket consent, then withdrew it. Although the consent requirement in the trust instrument supposedly limited the trustee’s discretion, it did not completely deprive the trustee of discretion because the co-beneficiary, who was also trustee, held the power to modify the terms of the trust.

In Lebow, the applicant could receive distributions of principal if the trustee, who was also a beneficiary of the trust, consented to such distributions. The court classified this trust as a Medicaid-qualifying trust (“MQT”) authorizing the trustee to distribute trust assets to the Settlor in his discretion and ruling the trust assets to be available in determining the applicant’s eligibility for MassHealth. In its decision, the Lebow court makes reference to the MQT statute, 42 U.S.C. §1396a(k), stating “the purpose of the statute is to prevent individuals from using trust law to ensure their eligibility for Medicaid coverage, while preserving their assets for themselves…” and the amount of a MQT that is deemed available to a grantor “is the maximum amount of payments that may be permitted under the terms of the trust to be distributed to the grantor.” §1396a(k), Lebow at 172. The court in Lebow then went on to state that “it does not matter whether a right in a trust has vested under traditional trust concepts.” Lebow at 177. This language does not mean that trust law is to be ignored, but that, consistent with the Cohen decision, assets will be considered available whether or not they may be distributed today if they may be distributed under any circumstances in the future. Thus, the proper analysis in this case is whether the trustee is allowed to distribute the principal of the irrevocable trusts to the Settlor without breaching the trustee’s fiduciary duties to the remainderpersons of the irrevocable trust.

MassHealth is usually far off base in attempting to draw similarities with Doherty, in which the assets of a trust were found to be countable because the applicant in Doherty was considered to be part of a class of beneficiaries who could receive the trust principal. In Doherty, the trustee had the power “ “in its sole discretion” and notwithstanding “anything contained in this Trust Agreement” to the contrary, “pay over and distribute the entire principal of [the] Trust fund to the beneficiaries thereof, free of all trusts,” so long as the trustees, “in [their] sole judgment,” determine that the “fund created . . . shall at any time be of a size which . . . shall make it inadvisable or unnecessary to continue such Trust fund.” Similarly, the trustee had the power to “determine all questions as between income and principal and to credit or charge to income or principal or to apportion between them any receipt or gain . . . notwithstanding any statute or rule of law for distinguishing income from principal or any determination of the Courts.” ” … In addition, the Settlor had directed the trustee to “accumulate the Trust principal to the extent feasible, due to the unforeseeability” of [the Settlor’s] “future needs” and “without regard to the interests of the remaindermen.” The Office of Medicaid argued that these provisions caused the trustee to have fiduciary duties to the Settlor, not the remainderpersons.

Where the trustee in Doherty had discretion to terminate the trust and “distribute the entire principal of such Trust fund to the beneficiaries thereof,” the premise of the decision to deem the entire trust as countable was based on a finding that “beneficiaries thereof” included the MassHealth applicant and therefore allowed the applicant to “have her cake and eat it too.”

The Office of Medicaid now seems to take what it likes out of the Doherty case in order to attack irrevocable trusts, but the Office of Medicaid cannot turn away from its official position in the Massachusetts court system on proper trust interpretation in the Doherty case. The correct legal position of the Office of Medicaid about trust interpretation (that it now seems to disavow) was stated on page 12 in the September 28, 2007 brief entitled “Defendant’s Opposition to Plaintiff’s Motion for Judgment on the Pleadings” filed in Essex Superior Court by Carolann Mitchell, Assistant General Counsel of the Executive Office of Health and Human Services in the Doherty case: “In reviewing contracts, the courts have found that a contract must be read in such a way that no part of the agreement is left meaningless. See Starr v. Fordham, 420 Mass. 178, 190 (1995); see also S.D. Shaw & Sons, Inc. v. Joseph Rugo, Inc., 343 Mass. 635, 640 (1962). In other words, contracts must be construed to give “reasonable effect” to each provision contained therein. See State Line Snacks Corp. v. Town of Wilbraham, 28 Mass. App. Ct. 717 (1990). …To allow the one sentence … to control the whole of this document would render the Settlor’s stated intent … completely meaningless. Such an interpretation of this trust is … against the weight of the law.”