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This blog is written by Brian E. Barreira, an estate planning, probate and elder law attorney with offices at 118 Long Pond Road, Suite 206, Plymouth, Massachusetts, and 175 Derby Street, Unit 19, Hingham, Massachusetts. Brian has been named a Massachusetts Super Lawyer® in Boston Magazine in 2009-2018, is listed in The Martindale-Hubbell Bar Register of Preeminent Lawyers in the fields of Elder Law and Trusts & Estates, Wills & Probate, and is the Editor of Massachusetts Continuing Legal Education's 3-volume Estate Planning for the Aging or Incapacitated Client in Massachusetts. Brian's biographical website can be found at SouthShoreElderLaw.com

Nothing on this blog should be considered to be legal advice or tax advice.

The Position of the Office of Medicaid in the Doherty Case Was that a Trust Must Be Read as a Whole, and that the Trustee’s Fiduciary Duties Are an Important Consideration

May 18, 2014

It has been a fundamental tenet of trust interpretation in Massachusetts for generations that the intention of the Settlor is to be respected, that the trust is to be read as a whole, and that any ambiguous or conflicting provisions are to be interpreted in a harmonious manner. In most MassHealth trust denials, there is no reasonable way of interpreting the irrevocable trust as providing for principal distributions to or for the benefit of the Settlor, yet the biased, unfair and unbalanced memorandum of the Office of Medicaid usually attempts to get away with placing a phrase from the irrevocable trust out of context. The memorandum introduced by the Office of Medicaid usually does not even make an honest attempt to get the law correct, even though the new legal position adopted by the Office of Medicaid stands in stark contrast to its official position when it was attacking the trust in the Doherty case.

The correct legal position about trust interpretation 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.”

On that same page in the brief, the position of the Office of Medicaid recognized the importance of fiduciary duties in trust analysis. The Office of Medicaid took the position that the Trustee in that case had fiduciary duties, but not to the remainderpersons, but rather to the Settlor: “The unambiguous language of Article II demonstrates the Trustees’ fiduciary duty runs to Muriel, and dictates that they can use all assets of the Irrevocable Trust for her care and benefit.” The opposite is usually true in most MassHealth trust denials, where the Trustee has fiduciary duties to the remainderpersons, and cannot distribute principal to or for the benefit of the Settlor without violating those duties.

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

May 18, 2014

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.”

If Debtor-Creditor Analysis Were Not the Proper Standard of Review under Medicaid Law for Irrevocable Trusts, Nursing Homes Could End up Being Unpaid for Services

May 18, 2014

As already noted on this blog, the lawyers at the Office of Medicaid has been on an attack against just about all trusts during the MassHealth long term care application process. The misleading memorandum of the Office of Medicaid usually describes the irrevocable trust as if the principal were directly payable to the Settlor, and completely ignores the financial consequences to the nursing home where care is being provided. Unfortunately, the nursing home needs to get paid, and the lawyers at the Office of Medicaid do not seem to be concerned about this issue.

As described on this blog in the past, the federal Medicaid law allows the Office of Medicaid to implement basic Massachusetts debtor-creditor law. If a nursing home resident’s MassHealth application is denied due to the existence of the irrevocable trust, and if the nursing home can reach the irrevocable trust as a creditor of the Settlor under Massachusetts debtor-creditor laws, then the nursing home could eventually be made whole by filing a lawsuit against the trust so that it would be forced to pay for the services rendered.

If, however, the MassHealth application is denied, and a creditor of the Settlor cannot reach the principal of the trust, then the trustee could not be forced to pay the nursing home. In this event, the nursing home would be left with no payment source. The unrelenting zeal of the lawyers at the Office of Medicaid to attack all trusts therefore misses the point of the federal law and can cause the nursing home to be the real financial victim of the MassHealth denial. Congress could not have intended such a disastrous financial result for the nursing home industry when it tightened the federal Medicaid trust laws in 1985 and 1993.

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. 

History of Medicaid Trust Law Reflects That Debtor-Creditor Analysis Is the Proper Standard of Review for Self-Settled Irrevocable Trusts

May 18, 2014

Before 1985, a Settlor could place the Settlor’s assets in trust for the Settlor, and grant the trustee complete discretion to distribute principal back to the Settlor. For some reason, the assets held in that type of trust were not counted as assets of the Medicaid applicant before 1985. Such a trust, however, would not have been effective against a creditor under state debtor-creditor laws. To eliminate this obvious loophole in the law, Congress changed federal Medicaid law to allow states to implement their existing debtor-creditor laws against that type of trust.

The Iowa case of Strand v. Rasmussen, 648 N.W.2d 95, 101 (2002) is mentioned by the Office of Medicaid, primarily to utilize a quote from it in a misleading manner. A more full reading from this case explains the evolution of Medicaid trust law: “Prior to 1986, an irrevocable trust was not considered to be an asset in determining whether an applicant was sufficiently needy to qualify for Medicaid benefits. … Yet, Congress and the states participating in the joint federal-state Medicaid program began to realize that many individuals with irrevocable trusts that otherwise would have made them ineligible for public assistance were receiving Medicaid benefits. They learned that many individuals confronted with escalating health care expenses and a corresponding depletion of personal assets were taking advantage of the trust gap in the Medicaid act by establishing trust funds to shield their own assets, commonly referred to as “self-settled trusts.” Cohen v. Comm’r of Div. of Med. Assistance, 423 Mass. 399, 668 N.E.2d 769, 771 (1996). As a result, these individuals were permitted “to have [their] cake and eat it too,” at the expense of those who were truly unable to financially care for themselves. Id. at 772; see Lebow v. Comm’r of Div. of Med. Assistance, 433 Mass. 171, 740 N.E.2d 978, 980 (2001) (referencing espoused purpose of 1986 federal Medicaid amendments, as stated by the founding members of the bill, to stop “`affluent individuals … [from] diverting scarce Federal and State resources from low-income elderly and disabled individuals'” (emphasis added) (citation omitted)); Allen v. Wessman, 542 N.W.2d 748, 753-54 (N.D.1996) (discussing overriding purpose of the Medicaid amendments). … In 1986, Congress attempted to close the “loophole” in the federal Medicaid act by promulgating provisions prohibiting individuals with considerable means from utilizing the law of trusts to secure eligibility for public welfare benefits. Lebow, 740 N.E.2d at 980; Cohen, 668 N.E.2d at 772; Cook v. Dep’t of Soc. Servs., 225 Mich.App. 318, 570 N.W.2d 684, 685 (1997); Ronney, 532 N.W.2d at 913-14; Allen, 542 N.W.2d at 754; 570 N.W.2d at 685; see Ramey v. Reinertson, 268 F.3d 955, 961 (10th Cir. 2001). The amendment created an exception to general trust law by including certain trusts with an individual’s assets for the purpose of determining whether an applicant’s resource level exceeded the maximum limits. Cook, 570 N.W.2d at 685; Ronney, 532 N.W.2d at 912. These prohibitive trusts were called Medicaid qualifying trusts.” As you can see, the quotes in this case apply to self-settled irrevocable trusts where there were explicit provisions whereby principal could always have been distributed to the Settlor.

The 2001 Connecticut case of Skindzier v. Commissioner of Social Services also explained the evolution of the availability of principal under federal Medicaid trust law: “Prior to 1986 …the ‘availability’ requirement of 42 U.S.C. § 1396a (a)(17)(B) provided a loophole by which individuals anticipating the need for expensive long-term nursing facility care could impoverish themselves and qualify for medicaid assistance while preserving their resources for their heirs. An individual could establish an irrevocable trust that permitted, but did not require, the trustee to disburse the income, but not the principal, of the trust to the individual. The trustee would pay the income from the trust to the grantor until the medicaid transfer ‘look back period’ had expired and the grantor’s transfer of assets to the trust, therefore, would no longer affect his eligibility for medicaid benefits. Thereafter, the trustee would exercise his discretion to withhold payments of trust income from the grantor. As a result, neither the trust principal nor the trust income would be resources ‘available’ to the grantor within the meaning of § 1396a (a)(17)(B), and the grantor would qualify for medicaid assistance. See H.R. Rep. No. 99-265, pt. 1, pp. 71-72 (1985)․Congress, however, tightened the ‘availability’ loophole provided by § 1396a (a)(17)(B) of the medicaid act by enacting the medicaid qualifying trust provisions set forth at 42 U.S.C. § 1396a (k) (1988). See H.R. Rep. No. 99-265, pt. 1, pp. 71-72 (1985)․ ‘[A] “medicaid  qualifying trust” is a trust established (other than by will) by an individual under which the individual may be the beneficiary of all or part of the payments from the trust and the distribution of such payments is determined by one or more trustees who are permitted to exercise any discretion with respect to the distribution to the individual.’  42 U.S.C. § 1396a (k)(2) (1988). The amount of a medicaid qualifying trust considered ‘available’ to an applicant for purposes of determining eligibility for medicaid benefits ‘is the maximum amount of payments that may be permitted under the terms of the trust to be distributed to the grantor, assuming the full exercise of discretion by the trustee or trustees for the distribution of the maximum amount to the grantor.  ․’ ․ 42 U.S.C. § 1396a (k)(1) (1988)․ Thus, pursuant to § 1396a (k)(1), all possible distributions that a medicaid applicant is capable of receiving from a trust (i.e., trust assets that actually are distributed to the grantor and trust assets that could be, but are not, distributed to the grantor) are considered in determining eligibility for medicaid benefits.”  (Citations omitted;  emphasis in original.)  Ahern v. Thomas, 248 Conn. 708, 713-17, 733 A.2d 756 (1999). The provisions set forth at 42 U.S.C. § 1396p (d), governing treatment of trust assets, “were enacted in 1993 in an effort to further tighten the ‘availability’ loophole of 42 U.S.C. § 1396a (a)(17).”  Id., at 720, 733 A.2d 756.   Section 1396p (d)(3)(A)(i), pertaining to revocable trusts, provides that “the corpus of the trust shall be considered resources available to the individual․” See also Uniform Policy Manual, supra, § 3028.11(B). Section 1396p (d)(3)(B)(ii), pertaining to irrevocable  trusts, provides in relevant part that “any portion of the trust from which no payment could under any circumstances be made to the individual shall be considered, as of the date of establishment of the trust to be assets disposed by the individual for purposes of subsection (c)․” … Section 1396p (d) applies to trusts established after August 11, 1993.   See Ahern v. Thomas, supra, 248 Conn. at 721, 733 A.2d 756.   It does not, however, apply to trusts established by will.  See 42 U.S.C. § 1396p (d)(2)(A) (subsection [d] applies to trust established “other than by will”).”

As explained in the Strand and Skindzier cases, the federal Medicaid trust laws since 1985 have simply allowed Massachusetts to implement its existing debtor-creditor laws against trusts. The Massachusetts debtor-creditor laws had been established under Merchants Nat’l Bank v. Morrissey, 329 Mass. 601 (1953), which held that under Massachusetts law, where the settlor is also the beneficiary of a self-settled trust, the settlor cannot keep property beyond reach of creditors by placing it in a spendthrift trust for the settlor’s own benefit. Also see Ware v. Gulda, 331 Mass. 68 (1954), where the Court stated: “The rule we apply is found in Restatement: Trusts, Section 156 (2): “Where a person creates for his own benefit a trust for support or a discretionary trust, his transferee or creditors can reach the maximum amount which the trustee under the terms of the trust could pay to him or apply for his benefit.”.” Note that this language is similar to the language in the federal laws regulating trusts in the Medicaid context.

The countability of irrevocable trusts for Medicaid purposes is governed by 42 U.S.C. §1396(p)(D)(3)(B), which states: “(i) if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which or the income on the corpus from which, payment to the individual could be made, shall be considered resources available to the individual, and payments from that portion of the corpus or income, (I) to or for the benefit of the individual shall be considered income of the individual, and (II) for all other purposes shall be considered a transfer of assets by the individual subject to a look back period.” Massachusetts was required to put that federal law into effect, and did so via the regulation at 130 CMR 520.023(C)(1)(C)(a), which states: “In the case of a self-settled trust… any portion of the principal or income from the principal, such as interest of an irrevocable trust, that could be paid under any circumstances to or for the benefit of the individual, is a countable asset.”

The Supreme Judicial Court in Cohen v. Commissioner of the Division of Medical Assistance, 423 Mass. 299 (1996), examined these laws, decided that the federal statute should be strictly construed, and took the position that “any circumstances” as outlined in the statute should mean that the “maximum amount capable of distribution under a trust is deemed to be an available resource of the beneficiary, regardless of whether the trustee actually exercises his or her discretion” to distribute funds. The trusts in question in Cohen and its companion cases had been so-called “trigger” trusts, which allowed the trustee to pay principal to or for the benefit of the Medicaid applicant but had that discretion terminated upon an event such as institutionalization.

What the Cohen holding means is that MassHealth stands in the same shoes as a creditor of the Settlor. The Settlor of a trust could not establish an irrevocable trust that allowed distributions to the Settlor but not a particular creditor; the creditor could sue the self-settled trust and reach the maximum amount capable of distribution to the Settlor. If a creditor could successfully sue the trust for a debt of the Settlor and get at the Settlor’s interest, then those are the “circumstances” under which an irrevocable trust would be treated as a countable asset under federal Medicaid law.

In Lebow v. Commissioner of the Division of Medical Assistance, 433 Mass. App. Ct. 171 (2001), the person who was trustee of the trust was also a beneficiary, and the Settlor was always a beneficiary. The trustee had the ability to pay principal back to the Settlor as long as he gave his consent as a beneficiary. Thus, the same person was wearing two hats, and the trust in that case was struck down, where there was no apparent intention to restrict principal distributions to the Settlor.

In Cohen and its companion cases, and in Lebow, the principal was explicitly available for distribution to the Settlor, and there was a thin veil of language protecting the principal so that it arguably was not distributable if Medicaid was desired. None of the trusts in Cohen or Lebow could not have passed muster under a debtor-creditor analysis; a creditor of the Settlor could always have reached the assets of these self-settled trusts. The trustee in those cases could always make distributions of principal to the Settlor, yet the thin veil of language allowed the trustee to attempt to claim later on that the discretion was no longer there; that is why the courts issued dicta along the lines of “having your cake and eating it too.”

The memorandum of the Office of Medicaid usually puts the reader through extreme mental gymnastics to claim the principal of the irrevocable trust is available to the Settlor, yet the case law under Cohen and Lebow was simply about principal distributions that could have unquestionably been made by the trustee to the Settlor or to the Settlor’s creditors without breaching any duty to the remainderpersons.

MassHealth Must Construe Federal Medicaid Law to Favor Applicants, and Cannot Be More Restrictive Than SSI

May 18, 2014

The Medicaid Act at 42 U.S.C. §1396a(a)(19) requires that each state Medicaid program be administered in the “best interests of the recipients,” and both the federal Medicaid law and its implementing regulations must be construed in favor of the Medicaid beneficiary. “The Social Security Act, of which Medicaid is a part, is in the nature of remedial legislation and is to be liberally construed.” See Cristy v. Ibarra, 826 P.2d. 361 (Court of Appeals, Co. 1991).

The MassHealth fact-finding process and trust law interpretation in this case is more restrictive than Supplemental Security Income (SSI) Program procedures. The MassHealth agency cannot utilize a methodology that is more restrictive than that used by SSI. See 42 U.S.C. § 1396a(a)(10)(C)(i)(III). A methodology is “considered to be ‘no more restrictive’ if, using the methodology, additional individuals may be eligible for medical assistance and no individuals who are otherwise eligible are made ineligible for such assistance.” 42 U.S.C. §1396a(r)(2)(B).

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

May 18, 2014

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.

Almost All Irrevocable Trusts Are Now Under Wrongful Attack During the MassHealth Application Process

May 18, 2014

Many irrevocable trusts in Massachusetts are now under wrongful attack during the MassHealth application process by the Office of Medicaid. In most cases, the application filed on behalf of the Settlor of the trust should be approved because the irrevocable trust in question does not constitute countable or available assets. In most cases, the irrevocable trust at issue allows for the Settlor to receive income only, and Medicaid law allows such trusts.

Even the method of attack of the irrevocable trusts is wrongful. In dozens of denied MassHealth applications in the past few years, the MassHealth applicant received no reason for the denial until the fair hearing has actually begun, and a misleading “confidential” memorandum is only then introduced into the record by the MassHealth eligibility worker. The memorandum prepared by Ms. Schelong, a lawyer representing the Office of Medicaid, attacks specific provisions of the irrevocable trust, but the arguments of the Office of Medicaid usually reflect an distorted misinterpretation of the irrevocable trust and an intentional misrepresentation of Massachusetts trust law.

Even though federal Medicaid law at 42 U.S.C. §1396a(a)(19) requires that each state Medicaid program be administered “in a manner consistent with simplicity of administration and the best interests of the recipients,” the Office of Medicaid now appears to take the position that all assets held in any trust, regardless of when the transfers into trust were made and regardless of the trust terms, should be counted for MassHealth purposes. This policy position is evidenced by the procedure of having the MassHealth eligibility workers submit every trust to the legal department of the Office of Medicaid, and invariably a vague denial is made, with the reasons being hidden until the fair hearing has begun. Despite writing that Medicaid is “a statutory program and not a program in equity,” the Office of Medicaid usually bases part of its reason for counting the assets of the irrevocable trust as countable assets on social policies surrounding the Medicaid laws. The Office of Medicaid usually cites the Lebow case for the principle that individuals must not deplete assets in order to qualify for MassHealth, but the statement that the Office of Medicaid relies on from that case is simply dicta. The federal Medicaid law does not make such a gross overgeneralization and does allow individuals to do as they wish with their assets during their lifetime, albeit with restrictions.

The law in general allows individuals to do as they wish with their property while alive and does not impose restrictions on an individual’s property rights. The transfer of assets is a right of every property owner that is free from governmental intrusion, so long as tax and governmental benefit laws are not violated. The Internal Revenue Service has set forth guidelines for giving funds within limits, and if the limits are exceeded, the gifts are reportable and possibly taxable. The Medicaid law provides strict rules for asset transfers prior to applying for Medicaid, and so long as individuals do not violate those rules, the Office of Medicaid cannot deny benefits based on one lawyer’s view of social policy. See 130 CMR 520.019. The federal Medicaid law was crafted by Congress with knowledge that some persons transfer assets in order to qualify for Medicaid, and was meant to balance an individual’s property rights with governmental interests regarding the steps that people can use to qualify for MassHealth.

The Office of Medicaid incorrectly contends that courts disfavor the use of irrevocable trusts by MassHealth applicants despite the Supreme Judicial Court of Massachusetts having specifically recognized the viability of so-called income-only trusts. Throughout the misleading memorandum the Office of Medicaid ignores that fundamental public policy can be found most directly in laws and corresponding regulations, all of which permit income-only trusts.

The misleading memorandum of the Office of Medicaid throws out quotes from cases in rapid succession without providing the proper context (or, in many cases, any context at all) for the quotes. In an effort to draw parallels between the irrevocable trust under attack with each of the trusts that were involved in the cases of 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), the Office of Medicaid misconstrues those important decisions. The Office of Medicaid usually cites the Lebow decision as standing for the proposition that “the common law and general trust laws and principals cannot be used to circumvent the Medicaid statute,” arguing that the standard trust law should be ignored if its application would render the MassHealth applicant eligible for MassHealth benefits, but anybody who actually reads the case would see that such a holding is nowhere to be found in the Lebow decision. Further, Doherty does not stand for the prohibition against the use of irrevocable trusts to shelter assets, as the Court makes the point that the decision was limited to the facts in that case and concludes: “we have no doubt that self-settled, irrevocable trusts may, if so structured, so insulate trust assets that those assets will be deemed unavailable.” Doherty at 442.

No statutory or case law provides that all trust law is to be ignored in the determination of eligibility for Medicaid benefits for long term care, so the position of the office of Medicaid that Massachusetts trust law should be ignored should itself be ignored. “An incorrect interpretation of a statute by an administrative agency is not entitled to deference.” Kszepka’s Case, 408 Mass. 843, 847 (1990). The case language usually quoted (out of context) by the Office of Medicaid does not mean that trusts may not be used effectively to protect assets. Federal Medicaid law (42 USC §1396p(d)) and Massachusetts MassHealth regulations (130 CMR 520.021-520.024) address the treatment of trusts in the Medicaid arena, and they do not come even close to stating that all trusts are presumed Medicaid ineligible or that all trust law is to be ignored. In fact, the Third Circuit Court of Appeals has already examined Congressional intent in the context of Medicaid trust laws and concluded that “there is no reason to believe [Congress] abrogated States’ general laws of trusts. … After all, Congress did not pass a federal body of trust law, estate law, or property law when enacting Medicaid. It relied and continues to rely on state laws governing such issues.” Lewis v. Alexander, 685 F.3d 325, 347 (3d Cir. 2012).

In the basic part of its misleading memorandum attacking trusts, the Office of Medicaid intentionally fails to mention what the Lewis court wrote about Medicaid trust law, and tries to mislead the hearing officer into believing otherwise.

32 Things You Should Know When Applying for MassHealth to Cover Nursing Home Care in Massachusetts

May 16, 2014

by: Brian E. Barreira, Esq.

MassHealth (nationally known as Medicaid) is the Massachusetts health care program that can help pay for nursing home care. MassHealth has lots of complicated rules, and you have to file a detailed application in order to try to get financial help from the MassHealth program. A lot of “helpful” people tell other people things about MassHealth that aren’t quite accurate. Some of the things you should know about MassHealth are:

1. Countable Assets. If you are a nursing home resident, you are allowed to keep only $2,000 in “countable assets.” Some assets can be kept if they are considered noncountable or inaccessible.  (See What Are Considered Noncountable Assets on a MassHealth Application? and also see What Is an Inaccessible Asset When Applying for MassHealth?)

2. Principal Residence. Your home is usually not considered a countable asset, unless it is in a revocable trust.  If you answer a key question the wrong way on the MassHealth application, the home is then considered to be a countable asset, and it has to be sold.

3. Spenddown. If you have countable assets over $2,000, you are required to “spend down” those assets, unless there are any permissible transfers available to you under the law.  Sometimes, the “spenddown” process can involve making investments.

4. Community Spouse Resource Allowance. If you are the spouse of a nursing home resident, you are allowed to keep up to $117,240 of the couple’s countable assets (as of 1/1/2014).  (See Protecting Assets and Maximum Income in 2014 When Applying for MassHealth to Help Pay for the Unhealthy Spouse’s Nursing Home Bills)

5. Personal Responsibility of Spouse. The community spouse is personally responsible under Massachusetts law for the unpaid nursing home bills of the institutionalized spouse.  (See Are You Personally Responsible for Your Spouse’s Nursing Home Bills in Massachusetts?)

6. Permissible Transfers. There are some types of gifts that can be made without any MassHealth penalty. Transfers of anything can be made to your spouse, to a disabled person, to a special needs trust for a disabled person, or to a pooled trust. Transfers of your home can sometimes be made to a sibling or a caregiving child.  (See Despite Medicaid Transfer Restrictions, Some Transfers of the Home are Always Safe and also see Proper Medicaid Planning May Permit Keeping the Home in the Family)

7. Interspousal Transfers. Gifts between spouses are always safe, so a MassHealth lookback problem does not apply. A large gift to a spouse who is not a United States citizen, however, can cause federal gift tax.  (See When Can Spouses Make Gifts to Each Other in 2014 without Causing a MassHealth or Federal Gift Tax Problem?)

8. Income. If you are a nursing home resident, your income is not available for alimony and is rarely available for household expenses. Your income can be used for your health insurance, and you are allowed a “Personal Needs Allowance” of $72.80. All of your other income goes to the nursing home unless you have a spouse or dependent child, or unless you have pre-eligibility medical expenses. (See Pre-eligibility Medical Expenses Can Be Paid from MassHealth Recipient’s Income)

9. Spouse’s Income. If you are the spouse of the nursing home resident, your income remains yours, and you may be able to receive some of the income of the nursing home resident to bring you up to at least $1,939 per month (as of 7/1/2013).  (See Minimum Monthly Maintenance Needs Allowance for Nursing Home Resident’s Spouse Is Now $1,939 until 6/30/2014 and also see What Is the Excess Shelter Allowance When Filing a MassHealth Application in 2013-2014?)

10. Noncountable Income. Some types of income are exempt from MassHealth consideration. Aid and Attendance from the Veterans Administration and Holocaust reparations payments are two examples of noncountable income.  (See What Income Is Considered to Be Noncountable in the MassHealth Application Process?)

11. Accumulated Noncountable Income. An accumulated amount of noncountable income can often be preserved as an asset and is not required to be spent before obtaining MassHealth eligibility.

12. Lookback Period. When applying for MassHealth, you are required to show account statements going back five years. Everything you did financially during this five year-lookback period can be scrutinized, and failure to provide the necessary information can result in a MassHealth denial.

13. Disqualifying Transfers. Any gifts or below market sales during the five-year lookback period can be treated as disqualifying transfers, and cause a period of MassHealth ineligibility. Unexplained expenditures can often be treated as gifts.  (See What Is Considered a Disqualifying Transfer When Applying for MassHealth?)  Fortunately for MassHealth applicants, exceptions can be made based on the intentions and circumstances that existed when the gift was made.  (See When Are a MassHealth Applicant’s Intentions Considered in Determining Whether a Disqualifying Transfer Occurred?)

14. Ineligibility or Disqualification Period. Any gifts or below market sales during the five-year lookback period can be penalized by a period of MassHealth ineligibility. Unfortunately, that period does not begin until you are left with only $2,000 in countable assets.  (See What Is the Difference Between the MassHealth Lookback and Disqualification Periods?)

15. Cures. Any gift that occurred within the last five years that is not a permissible transfer would cause a MassHealth penalty. Undoing the gift by giving the gift back to the MassHealth applicant undoes the penalty, and is known under MassHealth rules as a cure. Giving back less than the full amount is known as a partial cure.   (See What Is Considered to Be a Cure or Partial Cure by MassHealth?)

16. Jointly-Held Assets. Some assets held in joint names are considered equally owned by each joint holder, but a bank account that has the MassHealth applicant’s name on it is usually considered to be fully owned by the MassHealth applicant.  (See Jointly-Held Assets in Massachusetts: The Good, the Bad and the Ugly.)

17. Annuities. When an annuity is irrevocably annuitized, the stream of payments is considered income by MassHealth and the annuity is no longer considered to be a countable asset. In all other situations, an annuity is just another countable asset, so there is rarely any reason to buy an annuity in advance of its need. (See Is a Deferred Annuity Helpful from a Medicaid or MassHealth Standpoint? and also see Should You Get a Second Opinion Before Buying Annuities?)

18. Revocable Trusts. Assets held in revocable trusts are countable assets. If your home is in a revocable trust, it is considered to be a countable asset unless you get the home deeded back to your name.  (See In Medicaid Planning, Some Trusts Can Put Elderly Persons in a Worse Position Than If They Had Taken No Action At All)

19. Irrevocable Trusts. Irrevocable Trusts are closely scrutinized by MassHealth lawyers, who often write memos of law rejecting trusts. The more control you have over the trust, the more likely it will be attacked by MassHealth lawyers.  (See Doherty Case Should Cause Some Concern about Irrevocable Medicaid Trusts in Massachusetts) In fact, as of this date it appears that every trust involved in a MassHealth application is sent to MassHealth lawyers, and they challenge every trust.

20. Testamentary Trust for Spouse. Under federal Medicaid law since 1985, a trust for the surviving spouse’s benefit contained in the will of the predeceased spouse must be ignored for MassHealth eligibility, and the assets in that type of trust are protected.

21. Pooled Trust Account. Countable assets can become exempted from MassHealth spenddown requirements if placed in a pooled trust account for the MassHealth applicant’s benefit. Doing so can allow the nursing home resident to have more than the standard $2,000 available for future personal needs. (See What Is a Pooled Trust?)

22. Banking Information. You do not have to pay banks to retrieve five years of banking statements. Banks are required under Massachusetts law to give that information to you free-of-charge if you follow MassHealth procedures.  (See How to Obtain Free Banking Information for MassHealth Applications)

23. MassHealth Application Forms Are Available Online. Up-to-date MassHealth application and appeal forms can be found at MassHealthApplication.com. Brief explanations of the forms are included there.

24. MassHealth Application “Assistance”. The MassHealth application process is quite difficult for some families. Some nursing homes offer help with the MassHealth application, and some nursing homes refer families to non-lawyers who offer assistance with the MassHealth application. Unfortunately, they are not always aggressively representing the applicant’s interests or the family’s interests. The nursing home’s employees are probably not going to show you all of your options in preserving assets, and some MassHealth assistance companies may be motivated to sell an annuity as part of their advice. (See Should You Prepare and File a MassHealth Application on Your Own? and also see Should a MassHealth Applicant Accept Help from the Nursing Home’s Lawyer to Appeal a MassHealth Denial?)

25. Retroactivity of MassHealth. MassHealth benefits can be made retroactive to the first day of the third month before you applied, as long as you met the financial requirements at that earlier time.  (See Applying and Appealing to Receive Retroactive Medicaid Benefits in Massachusetts)

26. MassHealth Denial. The retroactivity of the MassHealth application is at stake if you do not appeal a MassHealth denial. For that reason, every MassHealth denial should be appealed. MassHealth eligibility workers are overworked, and can make mistakes that can be rectified by a hearing officer at a fair hearing. (See Should an Appeal Be Filed If a Denial for MassHealth Long Term Care Is Received?)

27. Fair Hearing. If you receive a MassHealth denial for any reason, you are entitled to challenge the denial by requesting a “fair hearing.” You have the right to due process, but it is sometimes an open question as to whether the hearing is actually fair, especially where hearing officers allow MassHealth to keep you in the dark about the reasons for the denial until the hearing has already begun. (See What Is a Fair Hearing under MassHealth, and Can You Really Expect It to Be Fair?)

28. Estate Recovery. After you have established eligibility, MassHealth is usually treated as a gift to you that you do not have to repay. If, however, you end up dying and having any assets go through probate, MassHealth can end up being a loan repayable to the Estate Recovery Unit at MassHealth. Any assets that you were allowed to keep during the MassHealth application process, including your home, can get scooped up by estate recovery.  (See What Is Estate Recovery by MassHealth?)

29. Long Term Care Insurance. Long term care insurance proceeds are treated as the MassHealth applicant’s income. As long as two key questions on the MassHealth application are answered correctly, any long term care insurance policy can preserve a MassHealth applicant’s home as an asset during the application process and also from post-death estate recovery claim.

30. MassHealth Liens. Sometimes, MassHealth places a lien on real estate that is owned or partially owned by a MassHealth applicant. When the MassHealth recipient returns home or dies, the lien is removed, and only the estate recovery laws apply at that point.  (See When Is a Lien Placed on a MassHealth Applicant’s Home and What Does the Lien Do?)

31. Life Estates Have Floating Values. When a life estate is sold, the life tenant is required by MassHealth to receive fair market value for the sale.  The value is based on the life tenant’s age, and the prevailing interest rates.  (See How Does MassHealth Treat a Sale of a Life Estate in 2014?) Unfortunately, as part of the overbroad attack now being made on trusts by MassHealth lawyers, a life estate in a trust is being treated as though the MassHealth applicant owns the entire trust, not just the life estate value.

32. Exceptions and Changes. Federal Medicaid laws and MassHealth regulations cover hundreds of pages and are constantly changing. Everything above does not cover the many exceptions that exist, and is meant to be a quick summary of major points as of the publication date.  Expect ongoing changes in laws, regulations and unwritten policies, and do not rely on anything that well-meaning friends tell you about the MassHealth application process.

How Does MassHealth Treat a Sale of a Life Estate in 2014?

March 7, 2014

by: Brian E. Barreira, Esq.

When a person who has a life estate wants to sell the real estate, the life tenant is legally entitled to a share of the proceeds.The amount of the proceeds that the life tenant is supposed to receive is based on his/her life expectancy and interest rates at the time of sale.

To calculate the value of the life estate, you must first determine what the applicable interest rate is.The interest rate in the month of the sale can be found at http://www.tigertables.com/7520.htm.Once you have this figure, you then go to IRS Book Aleph at http://www.unclefed.com/IRS-Forms/2001/p1457.pdf and look in Table S for the page displaying tables with that interest rate.Looking up the life tenant’s age on that page will get you the breakdown between the life tenant’s percentage interest in the proceeds and the other parties, who on that page are referred to as the “Remainder.”For further explanation, including an example, see MassHealth Eligibility Operations Memo 07-18.

Fortunately, interest rates have increased in the past year, so the process of calculating a life estate value is easier than it has been in the past couple of years.  If the interest rates required to be used are below 2.2, different IRS tables need to be looked at, so in that situation go to http://www.irs.gov/irb/2011-38_IRB/ar06.html.

The life tenant’s share of the proceeds can be eligible for the $250,000 capital gains exclusion under Internal Revenue Code Section 121, but often the persons receiving the remainder do not live there and their proceeds are subject to capital gains taxation without the ability to use that capital gains exclusion.Thus, it can often be advisable to wait until the life tenant’s death before selling real estate, so that the real estate will receive a step-up in basis under Internal Revenue Code Section 2036.

Note that the failure of the life tenant to receive the life tenant’s full share of the sale proceeds is considered a disqualifying transfer of assets under federal Medicaid law and MassHealth regulations, and is subject to the 5-year lookback period.

When Can Spouses Make Gifts to Each Other in 2014 without Causing a MassHealth or Federal Gift Tax Problem?

March 5, 2014

by:   Brian E. Barreira, Esq.

Under federal Medicaid law and MassHealth regulations, spouses have the right to transfer assets to each other at any time without causing a period of ineligibility from Medicaid, which is known as MassHealth in Massachusetts.  The purpose of the gift is not scrutinized by MassHealth, and the 5-year lookback period does not apply to cause a MassHealth disqualification period.  Gifts between spouses can even occur after a nursing home stay has begun and after a MassHealth application has been filed.

There is no Massachusetts gift tax.  For federal gift tax purposes, spouses who are both United States citizens can make gifts of any amount to each other at any time without causing any gift tax issue, and without even causing any need to file a federal gift tax return.  If one spouse is not a United States citizen, however, a federal gift tax problem can arise, since gifts made to a spouse who is not a U.S. citizen have their own annual exclusion amount, and are limited by federal tax law to $145,000 in 2014.

Any gift above $145,000 in 2014 to a spouse who is not a U.S. citizen would require the filing of a federal gift tax return by the spouse who makes the gift.  For most married couples, however, exceeding that amount would not pose any tax problem, since any gift in excess of $145,000 would not cause an immediate tax; rather, the amount of the gift in excess of $145,000 would merely use up some of the gift-giving spouse’s federal estate and gift tax exemption, which is $5,340,000 in 2014.

Protecting Assets and Maximum Income in 2014 When Applying for MassHealth to Help Pay for the Unhealthy Spouse’s Nursing Home Bills

January 28, 2014

One of the biggest mistakes that many community spouses (i.e., any spouse who is not in a nursing home) make when the other spouse enters a nursing home is not getting legal advice from an elder law attorney about Medicaid, known in Massachusetts as “MassHealth.” The “free” information that many community spouses and their families rely on can sometimes end up being quite costly to them.

There are different layers in MassHealth law.  Under the bottom layer, under 2014 law, just about everything other than the home and car are totaled, and the community spouse supposedly can keep only the first $117,240.00. (The rest of the assets are effectively owned by the spouse in the nursing home, and supposedly have to be spent on the nursing home bills of the institutionalized spouse; but note that I intentionally wrote the word “supposedly.”)  Fortunately, for community spouses, two other upper layers of the law effectively override the lower layer, and one upper layer is that the community spouse can enter into certain types of immediate annuity contracts with the spenddown (i.e., excess) assets.

Before even thinking about buying an annuity, the community spouse should note three things: (1) not every immediate annuity will work, where Massachusetts law makes most annuities assignable and the annuity purchased by the community spouse has to be irrevocable and nonassignable under federal Medicaid law and MassHealth regulations; (2) the published regulations and unpublished internal procedures and policies which now allow such a move can change with little advance notice, so it is often not advisable that an annuity be purchased until the institutionalized spouse’s nursing home stay has already begun; and most importantly (3) some community spouses can keep everything without needing an annuity, and are better off without an annuity, due to the other upper layer of MassHealth law that protects income for the community spouse.

At present, the community spouse has the absolute right to an income of at least 1,938.75 per month. (Further, if shelter expenses exceed 30% of this figure, or $581.62, or if a disabled child lives at home, the community spouse is often entitled to keep much more than $1,938.75 per month.) If the Social Security and pension payable in the name of the community spouse is less than the $1,938.75 figure, at the end of the MassHealth application process the community spouse is allowed to keep some or all of the institutionalized spouse’s income.  Because the monthly payment from an immediate annuity is considered to be the community spouse’s income, buying an annuity before the basic numbers have been analyzed by an elder law attorney could prevent the community spouse from receiving income from the institutionalized spouse. (That means the annuity payments in some cases would be simply replacing income that the community spouse was already entitled to have, and the annuity ends up not benefiting the community spouse.)

If the community spouse needs some income from the institutionalized spouse, there is a cap during the MassHealth application process of $2,931.00 per month. If the needs of the community spouse are greater than $2,931.00 per month, a higher amount of income can sometimes be preserved for the community spouse via the fair hearing appeal process, where the need to keep the other assets has to be proved to maintain the financial ability to remain in the community.  A common situation where need can be fairly easily proved is where the community spouse is living in an assisted living facility and needs to be there due to frailty, medical condition or other special needs.   Once the need to be in assisted living is established, the appeal is primarily about numbers and prevailing CD and money market interest rates, so the community spouse need not go to the hearing, and the elder law attorney can often handle it alone.

Another option to retain greater income for the community spouse is a Probate Court procedure known as separate support.  Since both spouses need legal representation in court, it is important that the institutionalized spouse have a durable power of attorney that allows the appointed person to hire a lawyer to represent the interests of the institutionalized spouse.

When spenddown and appeal options are determined by an elder law attorney as potentially unsuccessful, the community spouse can often purchase certain types of immediate annuities, which should always be the last resort due to the manner in which the institutionalized spouse’s income ca be allocated to the community spouse for MassHealth purposes.

A warning to the trusting and the gullible:  There are elder law “attorneys” and MassHealth application services who make a big chunk of their profit from selling annuities, so it is important to have the entire picture reviewed, and often to get a second opinion, before rushing into purchasing an immediate annuity from somebody who is selling it.

A final note:  Maintaining the maximum retroactivity of the original MassHealth application is vital to preserve assets for the community spouse and to ensure that the nursing home will be paid by MassHealth, so the MassHealth fair hearing appeal process should never be overlooked if any type of notice of denial is ever received along the way.  A community spouse can be successfully sued by the nursing home if timely MassHealth benefits are not obtained; see Are You Personally Responsible for Your Spouse’s Nursing Home Bills in Massachusetts?

An Analysis of the Tax and Medicaid Aspects of Various Types of Transfers of the Home

August 9, 2013

Different types of gifts and transfers of assets have very different results for tax and Medicaid purposes. The following is an analysis of the tax results of some basic types of transfers of a person’s home.

(A) Upon a transfer of a person’s home into a revocable trust…:

(1) Is there any gift tax? A completed gift has not been made, so a gift tax return would not be due.

(2) Will there be any capital gains tax upon a sale during the person’s lifetime? The $250,000.00 (or, for a married couple, $500,000.00) capital gains exclusion under Internal Revenue Code (“IRC”) Section 121 previously allowed to the person is preserved, assuming the person lived there for two (2) out of the past five (5) years.

(3) Will the home be included in the person’s gross estate? Pursuant to IRC Section 2038, the home is included in the person’s gross estate. Whether or not an estate tax will occur is based on the total of the gross estate for estate tax purposes.

(4) Upon the person’s death, what is the tax impact of the transfer on the heirs? The tax results are the same as if the person had kept the home in the person’s own name. A stepped-up basis as of the date of death will be obtained by the heirs.

(5) Is this type of transfer advisable in the Medicaid planning context? Extremely rarely, and never if nursing home costs are an issue. A home is a revocable trust often leaves a person worse off than if nothing had been done, since Medicaid law requires its sale if it remains in a revocable trust at the time of applying for Medicaid. This type of transfer could only work in a community Medicaid context, where the goal would be to avoid probate if the state looks solely to the person’s probate estate for estate recovery.

(B) Upon a transfer of the home which adds two (2) other persons as joint tenants with right of survivorship…:

(1) Is there any gift tax? A completed gift has been made of two-thirds (2/3) of the fair market value of the home, and a gift tax return should be filed.

(2) Will there be any capital gains tax upon a sale by the transferee during the person’s lifetime? If a transferee does not live in the home for two (2) years, there will be a capital gains tax. Whenever a transferee does not meet the IRC Section 121 requirements described in (A)(2) above, a capital gains tax will be imposed upon that person’s portion of the sale proceeds.

(3) Will the home be included in the giver’s gross estate? Under IRC Section 2040, financial contribution towards the purchase of the home must be traced, and since the recipients did not contribute towards the purchase, the fair market value of the home as of the giver’s death will be included in the giver’s gross estate.

(4) Upon the person’s death, what is the tax impact of the transfer on the heirs? Since the home would be fully included in the giver’s gross estate, the heirs would receive a stepped-up basis, and no capital gains tax would then result upon a sale which is made after the giver’s death.

(5) Is this type of transfer advisable in the Medicaid planning context? Sometimes, although the creditors and spouses of all joint tenants can eventually become involved in the ownership and decisions of when to sell the home. In states that have adopted the expanded estate recovery provisions of the federal Medicaid law, the giver’s reserved one-third of the home would be subject to an estate recovery claim.

(C) Upon a transfer of the home from one person to other(s) with a reserved life estate…:

(1) Is there any gift tax? A completed gift has been made of the remainder interest, but due to Chapter 14 of the Internal Revenue Code the amount of the gift to be reported on the federal gift tax return is the fair market value of the entire home on the date of the gift.

(2) Will there be any capital gains tax upon a sale during the person’s lifetime? The person’s life estate would be accorded an actuarial value at the time of the sale, and the person would be entitled to use the IRC Section 121 exclusion only to the extent of that value. Since the heirs received the remainder interest, they would be liable for capital gains tax on their share of the proceeds, unless they also met the IRC Section 121 requirements.

(3) Will the fair market value of the home be included in the giver’s gross estate? Pursuant to IRC Section 2036, the fair market value of the home would be included in the giver’s gross estate. Thus, while the giver has made a completed gift of the remainder interest, the full value of the home ends up being includable in the giver’s gross estate anyway. This result points out the practical reason that federal gift tax returns are often not filed in these cases. Another point which should be noted here is that, pursuant to IRC Section 2035, the release of a life estate is not effective for estate tax (and accompanying step-up or step-down in basis) purposes until 3 years after the date of the release; thus, for a person who wishes to make an outright gift, it may be better for estate tax purposes to reserve a life estate then later release it.

(4) Upon the giver’s death, what is the tax impact of the transfer on the heirs? The tax results are the same as if the person had kept the home in the person’s own name. A stepped-up basis will be obtained by the heirs.

(5) Is this type of transfer advisable in the Medicaid planning context? Often, as Medicaid law considers only the remainder interest to be a gift. In states that have adopted the expanded estate recovery provisions of the federal Medicaid law, the giver’s reserved life estate in the home, accorded an actuarial value as of the date of death,  would be subject to an estate recovery claim.

(D) Upon a transfer of the home to other(s) with joint (spousal) reserved life estates …:

(1) Is there any gift tax? The answer is the same as in (C)(1) above. Assuming the spouses co-owned the home prior to the transfer, the gift tax ramifications would be divided one-half (1/2) as to each spouse.

(2) Will there be any capital gains tax upon a sale during the persons’ lifetime? The answer is the same as in (C)(2) above, except that each spouse would be treated as if the spouse had been the owner of one-half (1/2) of the home prior to the transfer. If a sale occurred after the death of one of the spouses, the one-half (1/2) share of the decedent would be sold with a stepped-up basis.

(3) Will the fair market value of the home be included in either person’s gross estate? The answer is the same as in (C)(3) above, except that each spouse would be treated as if the spouse had been the owner of one-half (1/2) of the home prior to the transfer. Thus, only one-half (1/2) of the fair market value of the home would be includable in each spouse’s gross estate. (The total estate taxes due from both spouses could end up being minimized by this maneuver, since the full value of the home would not end up being includable in the surviving spouse’s gross estate.)

(4) Upon the death of both persons, what is the tax impact of the transfer on the heirs? The tax results are the same as if each person had kept one-half (1/2) of the home in the person’s own name. Upon the death of the surviving spouse, if the one-half (1/2) share of the predeceased spouse has appreciated in value, upon a sale the heirs would then have to pay a capital gains tax on that amount of appreciation.

(5) Is this type of transfer advisable in the Medicaid planning context? Often, as Medicaid law considers only the remainder interest to be a gift.  In states that have adopted the expanded estate recovery provisions of the federal Medicaid law, the giver’s reserved life estate in the home, accorded an actuarial value as of the date of death, would be subject to an estate recovery claim.

(E) Upon an outright gift of the home…:

(1) Is there any gift tax? A completed gift has been made. For gifts to persons other than the person’s spouse, a gift tax return should be filed. In most cases no gift tax would be due.

(2) Will there be any capital gains tax upon a sale by the transferee during the person’s lifetime? Unless the transferee meets the requirements described in (A)(2) above, a capital gains tax will be imposed upon the entire sale proceeds.

(3) Will the home be included in the person’s gross estate? Generally, a gifted asset is not subject to estate tax, but if the person continues to live in the home without paying fair market rent, the Internal Revenue Service (IRS) often takes the position that the full fair market value of the home is includable in the person’s gross estate as a “retained” life estate pursuant to IRC Section 2036. (See, e.g., Revenue Rulings 70-155 and 78-409.) The position of the IRS is based on an inferred agreement, understanding or assumption, as of the date of the gift, that the person would continue to live there.

(4) Upon the person’s death, what is the tax impact of the transfer on the heirs? The heirs would not have received a stepped-up basis, and a capital gains tax may then result upon a sale that is made after the person’s death. In cases where the federal and state estate and inheritance taxes would be less than the federal and state capital gains taxes, the heirs should attempt to use to their own advantage the position of the IRS described in (3) above, so as to cause inclusion of the fair market value of the home in the person’s gross estate and to receive a step-up in basis.

(5) Is this type of transfer advisable in the Medicaid planning context? Rarely, as there are often better choices for Medicaid and tax reasons.

(F) Upon a transfer of the home from one person to other(s) with a reserved special power of appointment (SPA)…:

(1) Is there any gift tax? An incomplete gift has been made, but the reporting of the gift on a federal gift tax return is required.

(2) Will there be any capital gains tax upon a sale during the person’s lifetime? At least one commentator has suggested that the retention of a SPA allows the person to be entitled to use the IRC Section 121 exclusion on the entire sale proceeds. The idea is untested, so an irrevocable grantor trust is a far safer choice if a sale is possible.

(3) Will the fair market value of the home be included in the giver’s gross estate? Pursuant to IRC Section 2038, the fair market value of the home would be included in the giver’s gross estate. Thus, while the giver has made a transfer for Medicaid purposes, the full value of the home ends up being includable in the giver’s gross estate anyway. Similar to the release of a life estate, pursuant to IRC Section 2035, the release of a SPA is not effective for estate tax (and accompanying step-up or step-down in basis) purposes until three (3) years after the date of the release; thus, for a person who wishes to make an outright gift, it may be better for estate tax purposes to reserve a SPA then later release it.

(4) Upon the person’s death, what is the tax impact of the transfer on the heirs? The tax results are the same as if the person had kept the home in the person’s own name. A stepped-up basis will be obtained by the heirs.

(5) Is this type of transfer advisable in the Medicaid planning context? Sometimes, in conjunction with a reserved life estate, although an irrevocable grantor trust can often be a better choice.

(G) Upon a transfer of the home to a Qualified Personal Residence Trust (QPRT)…:

(1) Is there any gift tax? The more valuable the home, the younger the person deeding the home into the QPRT, and the shorter the period that is selected to live there, the more likely there may be a gift tax, but a usage period can be selected to require no gift tax.

(2) Will there be any capital gains tax upon a sale during the person’s lifetime? The capital gain on a sale during the person’s selected usage period rebounds to the person if the grantor trust rules are applicable to the trust. After the selected usage period, any sale will trigger a capital gains tax.

(3) Will the fair market value of the home be included in the giver’s gross estate? Yes if the giver dies during the selected usage period. No if the person dies after the selected usage period and fulfills an appropriate rental agreement. Accordingly, shorter usage periods are usually favorable.

(4) Upon the death of the person, what is the tax impact of the transfer on the heirs? The heirs would receive a step-up in basis to the date-of-death fair market value of the home if the giver dies during the selected usage period or if the giver does not afterwards pay fair market rent. A carryover basis would apply if the person dies after the selected usage period and pays fair market rent.

(5) Is this type of transfer advisable in the Medicaid planning context? Rarely, as QPRTs are primarily done to minimize federal estate and gift taxes.

(H) Upon a transfer of the home into an irrevocable trust other than a QPRT…:

The answer to just about any tax question posed regarding an irrevocable trust is “it depends on the provisions of the trust,” but it should be noted here an irrevocable trust can be drafted to be a grantor trust and allow usage of the capital gains exclusion under IRC Section 121, as well as to allow the heirs to receive a step-up in basis under IRC Section 2036 or 2038, all while preserving the home from being treated as the person’s asset on a Medicaid application.

For detailed articles on some of the issues in this post, see the following:

Proper Medicaid Planning May Permit Keeping the Home in the Family

In Medicaid Planning, Some Trusts Can Put Elderly Persons in a Worse Position Than If They Had Taken No Action At All

Jointly-Held Assets in Massachusetts: The Good, the Bad and the Ugly

Life Estate Can Be “Retained” for Estate Tax Purposes under Internal Revenue Code Section 2036 without Being Reserved in Deed

Problems with Outright Gifts in the Medicaid Planning Context

Using Reserved Special Powers of Appointment in Medicaid Planning

A Primer for Elder Law Attorneys on Avoiding the Inadvertent Creation of General Powers of Appointment in Durable Powers of Attorney and Trusts

Doherty Case Should Cause Some Concern about Irrevocable Medicaid Trusts in Massachusetts

Massachusetts Appeals Court Case of Kaptchuk v. Director of the Office of Medicaid Shows That MassHealth Fair Hearing Appeals Should Not Be Treated Lightly

July 24, 2013

In the 2013 Massachusetts Appeals Court case of Kaptchuk v. Director of Office of Medicaid, a MassHealth denial was upheld.  An application for MassHealth benefits for Nina Kaptchuk had been denied due to “disqualifying transfers.”   A “fair hearing” had been requested, and the denial was not overturned.  A so-called 30A appeal was filed with the Superior Court under Massachusetts General Laws, Chapter 30A, Section 14, and the judge there did not overturn the denial.  On this further appeal to the Massachusetts Appeals Court, the MassHealth denial remained in effect.

The Superior Court and the Massachusetts Appeals Court only reviewed the facts presented at the fair hearing to see if the hearing officer analyzed the facts fairly. Unfortunately, new or better facts cannot be presented after a fair hearing. The Massachusetts Appeals Court suggested that the preparation for the fair hearing was inadequate. Transfers to or for the benefit of a disabled person can be treated as non-disqualifying, but the lawyer handling the appeal apparently did not introduce sufficient evidence proving the mental illness of the daughter who received amounts of money from Nina Kaptchuk.

Even though MassHealth regulations do not state what the MassHealth appellant’s burden of proof is, this Massachusetts Appeals Court decision states that the burden was on the MassHealth appellant to produce “convincing” evidence.

The point that should be taken from this case:  Do not treat any fair hearing lightly. Any point you want to make should be proven from every possible angle, and do not presume common sense. Most especially, do not assume that you will get another chance to explain the facts as you see them.

The decision is pasted below:

Appeals Court of Massachusetts. Nina KAPTCHUK v. DIRECTOR OF the OFFICE OF MEDICAID & another.FN1

FN1. Office of Medicaid Board of Hearings.

No. 12–P–1279. June 4, 2013.

By the Court (RUBIN, FECTEAU & HINES, JJ.).

MEMORANDUM AND ORDER PURSUANT TO RULE 1:28 *1 Plaintiff Nina Kaptchuk appeals from a judgment of the Superior Court that affirmed a decision of the Office of Medicaid Board of Hearings (board). In connection with Kaptchuk’s application for long-term nursing care benefits under the State Medicaid program, commonly known as MassHealth, the board disallowed approximately $64,800 as “disqualifying transfers” made during the five year “look-back” period prior to Kapchuk’s admission to the nursing home. See 130 Code Mass. Regs. §§ 520.019(B)(2), 520.019(C) (2009). Consequently, the board determined that Kaptchuk did not qualify for Medicaid benefits from September 13, 2010, through May 6, 2011.

The board found the verbal assertions made on Kaptchuk’s behalf by her counsel insufficient to carry Kaptchuk’s burden of establishing that the transfers at issue, allegedly made to cover the cost of Kaptchuk’s adult daughter’s monthly rental payments, did not constitute “disqualifying transfers” because they were made “exclusively for a purpose other than to qualify for MassHealth” benefits. 130 Code Mass. Regs. § 520.019(F)(1) (2009). On appeal, Kaptchuk avers that the board’s decision is unsupported by substantial evidence, as well as based on an error of law and is arbitrary and capricious. See G.L. c. 30A, §§ 14(7), 1(6); Forman v. Director of the Office of Medicaid, 79 Mass.App.Ct. 218, 221 (2011) (“reasonable interpretations by an agency of its governing law, which are supported by substantial evidence, must be respected”). In essence, Kaptchuk argues that it cannot fairly be inferred that she intended the transfers to qualify her for Medicaid benefits because: those transfers were commenced roughly four years before she was admitted to the nursing home; the transfers were made to assist her mentally ill daughter; and the transfers were monthly payments of a relatively nominal amount. The board found that Kaptchuk was admitted to a nursing home in April, 2010. During the previous sixty months, Kaptchuk made payments totaling $59,800, apparently to her adult daughter. Counsel for Kaptchuk represented to the board that those payments were to cover Kaptchuk’s adult daughter’s rent (about $1,150 per month).FN2 Particularly, Kaptchuk’s counsel represented that the daughter was mentally ill and that Kaptchuk’s intent was simply “to pay the daughter’s rent.” Kaptchuk did not introduce any evidence supporting counsel’s assertion that the daughter was, in fact, mentally ill, although the board found that guardianship proceedings at one time had been initiated but subsequently withdrawn and there were at least some unauthenticated documents before the board from doctors describing the daughter as schizophrenic. Moreover, it is undisputed that the daughter has never received Social Security disability income benefits or any other form of public assistance.

FN2. In addition, Kaptchuk transferred $5,000 in 2006 to her son and concedes that this payment constitutes a disqualifying transfer.

We agree with the judge’s conclusion that the board’s decision was not in error. Kaptchuk bore the burden to prove by convincing evidence that the money was transferred for an exclusive purpose other than to qualify for Medicaid, and verbal assurances, such as those from her attorney, to the effect that Kaptchuk was not considering Medicaid at the time of the transfers and that the transfers were to benefit Kaptchuk’s adult daughter were insufficient to satisfy that burden. See Gauthier v. Director of the Office of Medicaid, 80 Mass.App.Ct. 777, 785 (2011). The judge found significant the lack of any evidence that these monthly payments were, indeed, rental payments, that the daughter was not able to afford these payments without her mother’s financial assistance, and that the daughter was permanently or substantially disabled.

*2 As the judge noted, while there is some logic to Kaptchuk’s argument, it lacks an evidentiary basis. Given that the burden of persuasion is on Kaptchuk and she, based on the above, failed to meet this burden, the board’s decision is supported by substantial evidence. See G.L. c. 30A, § 14(7).

Additionally, Kaptchuk claims that the board clearly erred by concluding that the rental payments were not for “fair market value,” relying on Gauthier v. Director of the Office of Medicaid, supra at 786–787. See 130 Code Mass. Regs. § 520.019(F)(2) (2009). Her reliance is misplaced, however. While there was no evidence to indicate that the daughter did not receive fair market value for her rental, there was no evidence, unlike in Gauthier, establishing that Kaptchuk received a tangible benefit equivalent to the rental payments she made to her daughter. See id. at 784.

Judgment affirmed.

Massachusetts Case of Contested Will of Alice R. Sharis Shows Why Estate Planning Attorneys Need to Meet Alone with Their Clients

July 8, 2013

The contested will in the 2013 Massachusetts case of In the Matter of the Estate of Alice R. Sharis shows why lawyers need to meet alone with their clients.  When undue influence is alleged in an attempt to contest a will, the drafting lawyer’s actions can be on trial.  In my estate planning practice, I always insist on meeting alone with my elderly and disabled clients for at least part (and often all) of the initial conference, and if the lawyers involved in preparing the will of Alice R. Sharis had done so, it is possible that this will contest would not have been succcessful.

In this case, the grandson Richard had lived with his grandmother Alice and her husband Peter for over 9 years before their deaths.  At some point, the mental capacity of Alice and Peter began to decline, and Richard began to take over their finances, first by signing their checks without apparent legal authority, then later through use of a durable power of attorney that he prepared himself. Richard later had a meeting with a lawyer and asked him to prepare Alice’s will. The lawyer and his associate appear to have treated Richard as the client, where they communicated mostly with him, never met Alice, and merely had two brief telephone conversations with her; Richard even took care of the process of getting Alice’s will executed.

After Peter and Alice had both died, one of Alice’s children objected to her will, and there was a trial where the burden of proof was on Richard under Massachusetts law because he had a fiduciary relationship with Alice at the time the will was executed. The Probate Court judge hearing this will contest case made a finding that Alice lacked the advice of independent counsel. That was a significant finding, as the lawyers who prepared the will could have helped shield the will from legal attack. Since Richard had been too involved in getting the will prepared and executed, the Court turned its attention to other evidence proving that Alice’s actions were subject to the undue influence of Richard, and ruled against him.

On appeal, the Massachusetts Appeals Court pointed out that “the burden to prove the transaction was fair is generally met if the fiduciary shows that the principal made the request … with the advice of independent legal counsel.”  The Court also wrote:  “One of the functions of independent counsel is to provide documentation that the making and execution of a will is voluntary and knowing, thus lending transparency and credibility to the bequest.”

The point to take away from this case is:  Too much involvement in somebody else’s financial affairs can sometimes lead to your gift or inheritance being contested, so if a lawyer insists on meeting alone with a relative or friend of yours who is doing estate planning (including a will, trust or deed) and keeps you out of the room during the meeting, you may not like it but that lawyer might actually be doing you a favor.

Minimum Monthly Maintenance Needs Allowance for Nursing Home Resident’s Spouse Increased to $1,939 during 7/1/2013-6/30/2014

July 1, 2013

When one spouse is living in a nursing home and the other spouse is living anywhere else, the spouse who is not living in the nursing home (known under Medicaid and MassHealth law as the “community spouse”) is allowed by Medicaid or MassHealth to keep some (or sometimes all) of the nursing home resident’s income through an income allowance known as the Minimum Monthly Maintenance Needs Allowance (MMMNA).  Every July 1st, this figure changes based on federal poverty level guidelines.  The MMMNA was $1,891 from July 1, 2012 until June 30, 2013, and it will increase from $1,891 to $1,939 from July 1, 2013 through June 30, 2014.

If certain basic household expenses are more than 30% of the MMMNA, which is $582 from July 1, 2013 until June 30, 2014, the community spouse is entitled to keep extra income, known as the Excess Shelter Amount (“ESA”).  Between the MMMNA and the ESA, the community spouse can now be entitled to as keep as much as $2,898 of the married couple’s total income.  If even more income is needed, such as where the community spouse is living in an assisted living facility, the community spouse can request a fair hearing and attempt to prove the need for more than $2,898 of the married couple’s total income.

Utilizing the MMMNA provisions in Medicaid/MassHealth law is always better than purchasing an immediate annuity, since all payments from the annuity are treated as income, and taking that step ends up reducing the amount of the married couple’s retirement income that the community spouse could otherwise keep.  Unfortunately, due to the asset rules under Medicaid/MassHealth, in many situations the community spouse has no choice but to purchase an immediate annuity with excess assets.  See Protecting Assets and Maximum Income for the Community Spouse When Applying for MassHealth in 2013 to Help Pay for the Unhealthy Spouse’s Nursing Home Bills in Massachusetts.

Should You Ever Buy an Immediate Annuity at a Bank?

February 20, 2013

The “financial consultants” or “investment advisors” at banks don’t seem to know much about how MassHealth works, so my suggestion is that you never buy an immediate annuity at a bank without running the idea by an elder law attorney, such as one found via the National Elder Law Foundation.

Within the past month, a financial planner at a Plymouth bank suggested that one of my clients, a married person who has been diagnosed with Alzheimer’s disease, buy an immediate annuity with the funds in his IRA. This pressurized sales attempt occurred after his wife explained that she had met with me and that the plan was to be moving funds to her name.

The relentless selling of annuities at that bank appears to have no bounds. The clients involved in this situation were initially pressured by other people at the bank to meet with the financial consultant, then tried to cancel and received further pressure to keep the appointment.

Here’s why that financial consultant’s annuity idea was atrocious: When one member of a married couple buys an immediate annuity (which can be similar to buying a short-term pension) and soon thereafter needs nursing home care, that check will continue to be received by the institutionalized spouse, and will be treated as the institutionalized spouse’s income for MassHealth purposes.  Therefore, the funds that were invested into that immediate annuity, which could have been preserved for the at-home spouse if sensible financial planning had been done, usually are essentially lost. (For further explanation, see Protecting Assets and Maximum Income for the Community Spouse When Applying for MassHealth in 2013 to Help Pay for the Unhealthy Spouse’s Nursing Home Bills in Massachusetts)

You might think that someone who claims to have been an investment advisor for many years would have learned in detail about how annuities are treated by MassHealth, but you should not ever make that assumption when you are dealing with a bank. That is yet another reason not to be buying annuities at banks, where they may not even realize that they are causing financial harm to some married senior citizens.

Should You Buy a Deferred Annuity at a Bank?

February 1, 2013

Many of my clients walk into banks where they used to be able to trust in the safety of their investments, and are concerned about how little the interest rates are. Many banks have now “investment advisors” available, and elderly clients are shown that they can receive a higher interest rate on a deferred annuity that they could receive on a Certificate of Deposit. It is my understanding that tellers and bank managers may be receiving bonuses or other perks for identifying customers who could be sold an annuity.

Elderly clients trust the bank, and do not realize that the “investment advisors” and the bank will receive a healthy commission for making the annuity sale. Elderly clients who are sold deferred annuities often do not understand that if they want their money back, surrender charges will apply. That means they can lose a substantial amount of the original money placed into the annuity.

When one member of a married couple buys a deferred annuity and soon thereafter needs nursing home care, to obtain MassHealth coverage we often have no choice but to surrender the annuity and get stuck with the surrender charges. That is a reason not to be buying annuities at banks, where just about the only point they tell you about is that you’ll receive a higher interest rate.

I recently met with an older client who had no home and an investment portfolio of less than $300,000, including a speculative penny stock she had recently bought for $80,000 that was now worth only $20,000. It was apparent to me that her stock broker lacked any common sense and was putting her into gambles, so I referred her to a financial adviser that I trust. We have since learned that the failed stock broker has now been hired to be a “financial advisor” at a large bank. The fact that he is still in the financial business and will no doubt be convincing older people to purchase annuities that they do not need is one more reason not to be buying annuities at banks.

Is a Deferred Annuity Helpful from a Medicaid or MassHealth Standpoint?

January 14, 2013

A deferred annuity is almost never helpful from a Medicaid or MassHealth standpoint (despite whatever someone selling an annuity says).

For older married couples, the correct first move if one of them enters a nursing home is to move all assets into the name of the healthy one. (See Protecting Assets and Maximum Income for the Community Spouse When Applying for MassHealth in 2013 to Help Pay for the Unhealthy Spouse’s Nursing Home Bills in Massachusetts.)  That means the ownership of any annuity in the name of the institutionalized spouse has to be changed to the name of the at-home spouse; unfortunately, if that move is not allowed, the annuity has to be surrendered, and the surrender charges have to be paid. In particular, an annuity owned by the IRA of the institutionalized spouse always has to be surrendered, as there is no other way to transfer that asset directly to the name of the at-home spouse.

There is another type of annuity that can sometimes help preserve assets upon a nursing home stay and a MassHealth application, but that annuity (known as an immediate annuity) is a lousy investment and does not have to be purchased — and usually should not be purchased — until around the time of a MassHealth application.

Where a deferred annuity is never the right type of annuity for MassHealth purposes, why should anybody ever be buying it or selling it in the first place if the elderly person has future MassHealth concerns?  (See Is It a Good Idea for an Elderly Person to Purchase a Deferred Annuity? )

Should Massachusetts Law Be Changed to Require That Commissions on Annuities Be Disclosed in Writing?

January 13, 2013

I do not understand why there is no Massachusetts law that requires annuity salespersons to disclose their commissions in writing to the annuity purchaser. Some annuity salespersons are asked by customers about what their commission is but have been trained to avoid the question by answering that the annuity company takes care of the commission. This deviousness causes consumers not to be able to evaluate the personal financial motivation of the annuity salesperson.

One of my clients has even told me he considered the annuity salesperson to be his friend because he never saw any commission and didn’t get charged for the annuity.

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