The Case of Heyn v. Director of the Office of Medicaid Brings Much of Medicaid Trust Law in Massachusetts Back to Reality

Since the time that the Massachusetts Appeals Court handed down the decision of Doherty v. Director of the Office of Medicaid, 74 Mass.App.Ct. 439 (2009), lawyers representing the Office of Medicaid have been engaging in distortions of what was actually decided there. In Heyn v. Director of the Office of Medicaid, decided April 15, 2016, the Massachusetts Appeals Court clarified its decision in Doherty, and laid waste to a great deal of the Office of Medicaid’s legal distortions.

Everlenna Roche, the deceased settlor of the trust in question in the Heyn case, had filed a MassHealth application and been denied. A fair hearing was requested, and the Hearing Officer assigned to the case, Thomas J. Goode, ruled in Fair Hearing Decision 1306280 that there were circumstances where the assets of the trust could be made available to her.  On appeal to the Superior Court under Massachusetts General Laws, Chapter 30A, Judge William F. Sullivan upheld the hearing decision. In Heyn, the Massachusetts Appeals Court reversed those decisions and approved the trust and the MassHealth application.

Judge Sullivan and Hearing Officer Goode are emblematic of the frustrations that many Massachusetts elder law attorneys have had in recent years with MassHealth applications and appeals involving trusts, as their decisions have been inconsistent. A mere six days before affirming the decision in Fair Hearing Decision 1306280, Judge Sullivan had taken the exact opposite position in approving a similar trust in the Superior Court appeal of O’Leary v. Thorn, a case that was not appealed afterwards by the Office of Medicaid. Hearing Officer Goode, who had been the hearing officer in Fair Hearing Decision 0608458 (which was the fair hearing decision underlying the Doherty case), for years had apparently not seen an irrevocable trust he didn’t disapprove of, with his buying into the Office of Medicaid’s unsupportable claim that federal Medicaid trust law created a presumption that trusts were countable assets, then suddenly on December 4, 2014 reversed course in Fair Hearing Decision 1404746, and later issued Fair Hearing Decision 1509625, becoming a staunch intellectual critic of many of the anti-trust positions taken by the lawyers at the Office of Medicaid. Unfortunately, because of the inconsistent decisions rendered by them, as well as by other fair hearing officers and Superior Court judges, Massachusetts elder law attorneys had been left with uncertainty on the outcome of any case involving a trust.

The Heyn case should bring a great deal of logic and law back to the MassHealth application and appeal processes. In Heyn, the Massachusetts Appeals Court reviewed an irrevocable income-only trust and found it to be acceptable under federal Medicaid trust law. Several arguments against the trust had been raised by the Office of Medicaid at the fair hearing, and they were shot down by the court. Let’s review these issues not in order of importance, but rather in the order in which they present themselves in the Court’s opinion:

(1) In the “Background” provided by the Court, it is specifically stated that the trust owned “her former residence, held by the trust.”  Where the hearing officer had specifically rejected the arguments of the Office of Medicaid regarding the home being “available” under 130 CMR 520.023(C)(1)(d), perhaps the Office of Medicaid now may be estopped from continuing to raise that issue, which is not in accordance with law anyway; see Is a Home That Is Owned by an Irrevocable Trust Automatically a Countable Asset under Federal Medicaid Trust Law?

(2) The Doherty case was about a particular trust, and did not change Massachusetts Medicaid trust law. The Massachusetts Appeals Court specifically stated in its decision that “it is settled that, properly structured, such trusts may be used to place assets beyond the settlor’s reach and without adverse effect on the settlor’s Medicaid eligibility.”

(3) Under the 1993 federal Medicaid trust law, “countable assets” include any portion of the trust principal that could “under any circumstances” be paid to or for the benefit of the settlor of the trust.  The proper standard of review is “assessing whether the trust would allow distribution of principal.”

(4) The trustee had the power to make distributions of assets from the trust to persons other than the settlor, and the Court had no problem with that power and did not even choose to comment on it specifically.  The Court did implicitly render a comment in another context that “a provision making trust principal available to persons other than the grantor does not by its nature make it available to the grantor.” Thus, a provision in an irrevocable income-only trust that allows distributions to persons other than the settlor or the settlor’s spouse has been approved by the Massachusetts Appeals Court.

(5) The settlor had reserved a special or limited power of appointment, the “power, exercisable at any time or from time to time, by written instrument during the Grantor’s lifetime or by the Grantor’s will or any codicil thereto, to appoint any part or all of the principal or income of this Trust to any one or more of the Grantor’s issue.” The Court had no problem with that power, concluding that “a provision making trust principal available to persons other than the grantor does not by its nature make it available to the grantor, any more than if the grantor had gifted the same property to such a person when she created the trust, rather than placing it in trust.”  Thus, a provision in an irrevocable trust wherein the settlor reserves a special or limited power of appointment, exercisable either during lifetime or by will, has been approved by the Massachusetts Appeals Court.

(6)  The hearing officer had concluded that the irrevocable trust was countable because there was a possibility that the recipients of assets from the trust could return those assets to or use them for the settlor.  The Court shot down that type of analysis, because “for purposes of computing countable assets, Medicaid does not consider assets held by other family members who might, by reason of love but without legal obligation, voluntarily contribute monies toward the grantor’s support.” Thus, the Office of Medicaid is precluded from presuming collusive activities between the settlor and other trust beneficiaries, and is limited to a one-step analysis when reviewing any trust provision.

(7) The trustee had the power to make allocations between principal and income.  The Court had no problem with that power because the trustee’s authority was constrained by “reasonable accounting principles and practice and state law.” Thus, the argument often made by lawyers at the Office of Medicaid that state law doesn’t matter in reviewing a trust under Medicaid law was eviscerated.

(8) The settlor had reserved a so-called power of substitution, entitling the settlor to require the trustee to “transfer any trust assets in exchange for assets of equivalent value,” exercisable by the settlor “solely in a nonfiduciary capacity.” The Court had absolutely no problem with that power, concluding that “[s]uch an exchange would be equivalent to a sale of trust assets, with the grantor in the role of purchaser and the proceeds of the sale nonetheless retained by the trust as principal. Such a transfer would not effect any distribution or diminution of trust principal, any more than a sale of trust assets to unrelated third parties, followed by a reinvestment of sale proceeds by the trust.” Thus, a power of substitution is viewed by the Massachusetts Appeals Court as an option to purchase at fair market value, not a prohibited power to receive assets from the trust.

(9) Central to the case was that the Office of Medicaid had argued, and the Hearing Officer and Superior Court judge had concluded, that the trustee could purchase an annuity, and treat all of the payments, including the return of principal, as income distributable to the settlor. The Court confirmed the major points made in Potential Annuity Purchases by the Trustee Do Not Provide the Settlor of an Income-Only Irrevocable Trust with Access to Principal. The Court shot down the Office of Medicaid’s annuity argument, stating that “the allocation of annuity payments as between principal and income is governed by G. L. c. 203D, § 18(a), which creates a statutory presumption that any amount received by the trust, not expressly characterized as dividend or interest income, shall be allocated to principal.” The Court re-emphasized the point by stating that “[t]he income portion available for distribution in such circumstances would be no different in character than interest earned on a certificate of deposit, dividends from stocks purchased and held by the trust, or other income earned on any trust assets.” Further, this conclusion by the Massachusetts Appeals Court was made by utilizing Massachusetts law, further eviscerating the argument often made by lawyers at the Office of Medicaid that state law doesn’t matter in reviewing a trust under Medicaid law.

(10) The Court appears to have concluded its decision by attempting to minimize the continued usage of the Doherty case as a reason for issuing denials in MassHealth applications involving irrevocable trusts, as the Court explained Doherty: “[P]ursuant to the terms of the trust there are no circumstances under which the trustee may distribute trust principal to Roche. The case is in that respect in contrast to Doherty, supra, in which Art. XXII of the trust expressly authorized the trustee “in its sole discretion” and notwithstanding “anything contained in this Trust Agreement” to the contrary, to “pay over and distribute the entire principal of [the] Trust fund to the beneficiaries thereof [including the Medicaid applicant], free of all trusts.””  Thus, the Massachusetts Appeals Court clarified the narrow rationale for its decision in Doherty, and highlighted that, for the trust’s assets to be deemed countable assets, there must be a direct path of the trust assets from the trust to the settlor.

(11) In footnote 10, the Court includes the following quote from the trust:  “The Grantor intends that this trust be a grantor trust for federal income tax purposes and all provisions of this trust shall be construed so as to effectuate this intent.” Thus, where the Massachusetts Appeals Court did not otherwise mention this provision in its decision, the Court has implicitly approved it, so the intention that an irrevocable trust be a grantor trust for federal income tax purposes is legally a non-issue when reviewing an irrevocable trust for Medicaid purposes.

Until we actually see how the lawyers representing the Office of Medicaid react to the Heyn decision, optimism should be temporarily tempered, but the Massachusetts Appeals Court appears to have left them little room for continued distortions about the Doherty case and how to apply federal Medicaid trust law when reviewing irrevocable trusts.