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In the 2017 Case of Daley v. Secretary of the Executive Office of Health and Human Services, the Supreme Judicial Court of Massachusetts Rules That a Home May Be Effectively Deeded to an Irrevocable Trust under Federal Medicaid Law

September 27, 2017

On May 30, 2017, the Supreme Judicial Court of Massachusetts (“SJC”) issued its opinion in the case of Mary E. Daley v. Secretary of the Executive Office of Health and Human Services, 477 Mass. 188 (2017).  We filed a petition for rehearing (which is essentially a motion for reconsideration) on some of the language in the opinion, and the Office of the Attorney General issued a weak response, but unfortunately the Court chose to let every word of its opinion stand.

The basic part of the decision was easy for the Court. The Court ruled that a person’s home in an irrevocable trust must be treated the same as any other asset.  According to the Court, the right to live in the home does not cause the principal of the trust to be a countable asset for MassHealth purposes, and is merely the equivalent of having the right to the income generated from renting it out.

The Court sidestepped the issue as to whether it is problematic to have a right to be reimbursed from trust principal for taxes that under federal income tax law had rebounded from the trust back to the settlor’s personal tax returns.  Under federal income tax law, a trust can be irrevocable yet have certain sentences that cause the income and capital gains of the trust to be taxable not to the trust, but rather to the settlor. This type of trust, known for many decades by the IRS and tax practitioners as a grantor trust, but embarrassingly referred to by the SJC twice in its opinion as a “grantors trust,” is commonly drafted for Medicaid planning purposes. The SJC remanded this tax issue (which, even though we had briefed it, had not been decided below) back to the agency for its consideration, which essentially means further litigation.

The Court had on its own initiative consolidated our Daley case with the Nadeau case, and in Nadeau the Court commented on something that had gone unmentioned by the agency in its briefs at the fair hearing, in Superior Court and at the SJC.  It is indeed an oddity for any court to comment on an unmentioned and unbriefed issue without requesting briefs, and it is a travesty when the court blurts out something ignorantly. Here, the Court noticed a provision in the Nadeau trust known as a power of appointment, and the power allowed gifts to be made to nonprofit organizations.  The Court then “reasoned” that this power to make gifts could possibly be used to make payment of the powerholder’s nursing home bills whenever staying in a nursing home that is run as a nonprofit organization.  In this dicta, the court did not even bother to try explaining how having a power to make a gift could equate with having the gift applied to your debt, especially where the recipient of the gift would have to act collusively and in violation of fiduciary duties for the gift to be applied to the debt.  The petition for rehearing accurately spelled out the longstanding law about powers of appointment, but the court chose not to edit its written decision, even leaving in its new phrase “grantors trust” as an embarrassment for the ages.

As could be expected from the Office of Medicaid’s recent antics, the agency is already misstating what the SJC’s decision said, so the litigation over irrevocable trusts will continue in Massachusetts. Anybody who already has an irrevocable trust should immediately have it reviewed by an elder law attorney in light of this new SJC decision, and any trust (or deed) that mentions non-profit organizations, tax reimbursement or the right to use and occupancy of the home may need to be changed.

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