Heyn v. Director of the Office of Medicaid (Lawyers Weekly No. 11-043-16)
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15-P-166 Appeals Court
EILEEN M. HEYN, personal representative,1 vs. DIRECTOR OF THE
OFFICE OF MEDICAID.
No. 15-P-166.
Worcester. February 5, 2016. – April 15, 2016.
Present: Green, Hanlon, & Henry, JJ.
Medicaid. Trust, Self-settled trust, Irrevocable trust,
Distribution, Allocation of payments between principal and
income, Power of appointment. Annuity.
Civil action commenced in the Superior Court Department on
December 12, 2013.
The case was heard by William F. Sullivan, J., on a motion
for judgment on the pleadings.
Patrick Tinsley for the plaintiff.
Daniel J. Hammond, Assistant Attorney General, for the
defendant.
Patricia Keane Martin, Robert P. Ford, Kathryn E. Szewczyk,
& Don J.J. Cordell, for National Academy of Elder Law Attorneys
(Massachusetts Chapter), amicus curiae, submitted a brief.
GREEN, J. We are called upon yet again to review a
determination that assets within a self-settled irrevocable
1 Of the estate of Everlenna Roche.
2
inter vivos trust should be treated as available to the trust
grantor for payment of nursing home expenses (and,
correspondingly, render the grantor ineligible for Medicaid
benefits). We conclude that a hearing officer of the MassHealth
board of hearings erroneously concluded that the trust at issue
permitted its trustee to distribute proceeds from the sale of
trust assets to the grantor in certain circumstances.
Consequently, we reverse the judgment of the Superior Court
affirming MassHealth’s termination of benefits to the
plaintiff’s decedent.2
Background. From November 4, 2011, until her death on
August 25, 2013, the plaintiff’s decedent, Everlenna Roche,
resided at a skilled nursing facility in Westborough.
Approximately eight and one-half years earlier, Roche had
established the Everlenna R. Roche Irrevocable Trust (trust),
and transferred to it title to her home at 10 Baker Way,
Westborough, retaining a life estate.3 Upon moving into the
2 We acknowledge the amicus brief submitted by the National
Academy of Elder Law Attorneys, Inc. (Massachusetts chapter).
3 The defendant makes no argument that the life estate
retained by Roche might itself have a value that could affect
her eligibility for benefits, stating in its brief that it is “a
correct statement of the law under Cohen [v. Commissioner of the
Div. of Med. Assistance, 423 Mass. 399 (1996), cert. denied sub
nom. Kokoska, by Kokoska v. Bullen, 519 U.S. 1057 (1997),] and
its progeny” that retention of a life estate does not render an
individual ineligible for benefits. We do not consider the
question.
3
skilled nursing facility, Roche applied for MassHealth benefits
to pay for the cost of her care, and her application was
initially approved. On March 27, 2013, MassHealth notified
Roche that her eligibility for MassHealth benefits was
terminated, based on its conclusion that her former residence,
held by the trust, should be treated as a countable asset with a
value in excess of the maximum asset value permissible to retain
eligibility.4 Roche timely appealed the termination of her
benefits, and a hearing was held on June 20, 2013. On October
8, 2013, following her intervening death in August of that year,
a decision on her appeal issued, upholding the termination of
benefits. In the decision, the hearing officer reasoned that
the trust instrument authorized the trustee to sell trust
assets, and to invest the proceeds of any such sale in other
forms of investment, including an annuity.5 Since the trust also
authorized the trustee to make distributions of income to Roche,
the hearing officer concluded that annuity payments resulting
from any annuity purchased by the trustee with trust principal
4 According to the notice, the value of the property was
$ 214,423, based on the then most recent assessment for the
property. Under 130 Code Mass. Regs. § 520.016(A) (2010), if
“countable assets” available to an institutionalized single
applicant exceed $ 2,000, the applicant is ineligible for
Medicaid benefits. The plaintiff does not dispute on appeal the
value assigned to the property in the MassHealth notice.
5 We reserve detailed discussion of the trust provisions for
our discussion below.
4
could be distributed from the trust as income, and thereby be
made available to provide support to Roche. After denial of the
plaintiff’s motion for rehearing, the plaintiff appealed the
decision to the Superior Court pursuant to G. L. c. 30A, § 14,
where a judge of that court denied the plaintiff’s motion for
judgment on the pleadings and affirmed the administrative
decision. This appeal followed.
Discussion. As intimated in our introduction, the effect
of the provisions of self-settled irrevocable inter vivos trusts
on eligibility for Medicaid benefits has been the subject of
considerable discussion. See, e.g., Cohen v. Commissioner of
the Div. of Med. Assistance, 423 Mass. 399, 401-407 (1996),
cert. denied sub nom. Kokoska, by Kokoska v. Bullen, 519 U.S.
1057 (1997). See also Lebow v. Commissioner of the Div. of Med.
Assistance, 433 Mass. 171, 172-173 (2001); Guerriero v.
Commissioner of the Div. of Med. Assistance, 433 Mass. 628, 629-
632 (2001); Doherty v. Director of the Office of Medicaid, 74
Mass. App. Ct. 439, 440-443 (2009). The legislative history and
case law concerning the treatment of self-settled trusts reflect
awareness of the possibility that comparatively affluent
individuals might avail themselves of such trusts as an estate
planning tool, in order to qualify for benefits. See Cohen,
supra at 403-404. The resulting law reflects a compromise, with
provisions for so-called “look back” periods for transfers of
5
assets preceding an application for benefits, see 42 U.S.C.
§ 1396p(c)(1)(B)(i) (2012),6 and strict requirements governing
the extent to which assets must be made unavailable to the
settlor in order to avoid being treated as “countable assets”
for purposes of Medicaid eligibility. Nonetheless, it is
settled that, properly structured, such trusts may be used to
place assets beyond the settlor’s reach and without adverse
effect on the settlor’s Medicaid eligibility. See, e.g.,
Guerriero, supra at 633. See also Doherty, supra at 442-443.
Like the trust at issue in Doherty, supra at 440, and
unlike the trusts in Cohen, supra at 408 n.15, Lebow, supra at
172 n.2, and Guerriero, supra at 631, the trust in the present
case is governed by the provisions of the statutory and
regulatory framework in effect after 1993, following amendments
to 42 U.S.C. § 1396p(d)(3)(B). Under the post-1993 version of
the statute, for purposes of determining eligibility for
Medicaid benefits, “countable assets” include any portion of the
trust principal that could “under any circumstances” be paid “to
or for [the] benefit [of]” Roche.7 Doherty, supra. Such
6 Under that section, a thirty-six month “look back” period
applies to transfers of assets prior to any application for
benefits, and a longer, sixty-month, “look-back” period applies
to assets placed into trust. See Guerriero, supra at 631.
7 The “any circumstances” test replaced the former
“peppercorn of discretion” test, which previously considered
whether the trustee of an irrevocable trust could, in the
6
circumstances need not have occurred, or even be imminent, in
order for the principal to be treated as “countable assets”; it
is enough that the amount could be made available to Roche under
any circumstances. See Lebow, supra at 177-178.
In assessing whether the trust would allow distribution of
principal to Roche “under any circumstances,” we construe its
provisions in light of the trust instrument as a whole. See
Doherty, supra at 441. With that principle in mind, we examine
the provisions of the trust that bear on the question. Article
SECOND mandates quarterly distribution of trust income to the
grantor for the remainder of her life. It also allows the
trustee to distribute part or all of the trust principal to
persons other than the grantor who are entitled to receive trust
assets after the death of the grantor. Finally, it contains a
reservation to the grantor of the power during her lifetime to
“appoint any part or all of the principal or income of th[e
t]rust to any one or more of the [g]rantor’s issue, free of
trust.”8
exercise of discretion, distribute principal to the person
seeking benefits, regardless whether such discretion was
exercised in fact to make a distribution. See Cohen, supra at
413 & n.20. Though the motion judge framed his analysis by
reference to the “peppercorn of discretion” test, the difference
is immaterial to the result in this case.
8 Article SECOND reads as follows:
7
Separately, Art. EIGHTH grants broad authority to the
trustee to deal with trust assets, including the rights to sell
assets and invest the proceeds of such a sale in another form of
asset, and “to determine, in accordance with reasonable
accounting principles and practice and state law, what shall
belong and be chargeable to principal and what shall belong and
be chargeable to income.”9 Finally, Art. NINTH includes a
“SECOND: A. The Trustee shall pay to the Grantor all of
the net income of the Trust, quarterly or more often, for
the remainder of the Grantor’s life.
“B. During the life of the Grantor the Trustee may
distribute part or all of the principal of this Trust to
any persons (other than the Grantor) otherwise entitled to
the assets of this Trust after the death of the Grantor.
“C. The Grantor reserves the power, exercisable at
any time or from time to time, by written instrument during
the Grantor’s lifetime or by the Grantor’s will or any
codicil thereto, to appoint any part or all of the
principal or income of this Trust to any one or more of the
Grantor’s issue, free of trust of [sic] otherwise,
referring specifically to this special power of appointment
in such written instrument, will, and/or codicil.”
9 Pertinent provisions of Art. EIGHTH include the following:
“EIGHTH: In addition to the other powers given to the
Trustee in this Trust Agreement or by law, the Trustee
shall have the following powers in each case to be
exercised in his, her or its sole discretion, upon such
terms as he, she or it deems advisable and without leave of
any court:
“A. to make and retain any investment, without notice
to or consent of any interested party, including, without
limiting the generality of the foregoing, the purchase,
sale or writing of put or call options relating to any
security or index, the purchase or sale of commodities (or
8
provision entitling the grantor to require the trustee to
“transfer any trust assets in exchange for assets of equivalent
value,” and provides that such power would be “exercisable [by
the grantor] solely in a nonfiduciary capacity,” free from
restriction by any fiduciary duty imposed on the trustee.10
options thereon), the purchase or sale of domestic and
foreign currencies and the purchase and sale of marketable
and non-marketable securities including interests in
limited partnerships of all types, although any of the
investments so made or retained may be of such kind or in
such amount or proportion that they would not otherwise be
proper;
. . .
“O. to determine, in accordance with reasonable
accounting principles and practice and state law, what
shall belong and be chargeable to principal and what shall
belong and be chargeable to income, and without limitation
to make such determination in regard to stock and cash
dividends, rights and other receipts in respect to the
ownership of stock, to purchase or retain stock that pays
dividends in whole or in part otherwise than in cash and to
treat such dividends in whole or in part as principal or
income and to amortize or to refrain from amortizing bond
premiums[.]”
10 Article NINTH is as follows:
“NINTH: The Grantor intends that this trust be a grantor
trust for federal income tax purposes and all provisions of
this trust shall be construed so as to effectuate this
intent.
“A. Upon the demand by EVERLENNA R. ROCHE, the
Trustee shall transfer any trust assets in exchange for
assets of equivalent value. This power is exercisable by
EVERLENNA R. ROCHE solely in a nonfiduciary capacity, and
no fiduciary duty imposed upon the Trustee of any other
person may be asserted as a defense to the exercise of the
powers granted under this Article.
9
As we have observed, the hearing officer concluded that the
trust authorized distributions of principal to Roche under
identifiable circumstances. In particular, pertinent to this
appeal the hearing officer suggested that the trustee could sell
the property, invest the proceeds in an annuity, and then treat
the resulting annuity payments as income eligible for
distribution. The analysis misapprehends the nature of annuity
payments. Annuity payments are comprised of distinct
constituent parts. One part is a return of a portion of the
principal investment in the annuity itself; the other part is a
portion of the investment income earned on the principal
investment. Following each payment, the remainder of the
principal investment remains in the annuity contract, accruing
income. Federal Medicaid law recognizes these distinguishable
parts, as does the United States Internal Revenue Code. See,
e.g., 42 U.S.C. § 1396p(e)(2)(B) (2012) (distinguishing between
the amount of an annuity’s “income or principal” being
withdrawn); 26 U.S.C. § 72(a) & (b) (2012). Out of each annuity
payment, only the investment income portion would be available
“B. EVERLENNA R. ROCHE may waive this power by a
writing delivered to a Trustee, and such waiver shall bind
EVERLENNA R. ROCHE, the Trustee, and all other persons.”
10
for distribution to the grantor from the trust;11 that portion of
each payment representing a return of capital would be required
by the trust instrument to be retained in the trust. The income
portion available for distribution in such circumstances would
be no different in character than interest earned on a
certificate of deposit, dividends from stocks purchased and held
by the trust, or other income earned on any trust assets. In
all events, the trust principal is preserved in the trust, and
is not available for distribution to the grantor under the
governing provisions of the trust.12
The foregoing analysis is unaffected by the authority of
the trustee, provided by Art. EIGHTH O., and noted by the motion
judge, to determine the allocation as between principal and
income of any proceeds of trust assets, because the trustee’s
authority in that respect is expressly constrained by
“reasonable accounting principles and practice and state law”
(emphasis added). See note 9, supra. In particular, the
allocation of annuity payments as between principal and income
is governed by G. L. c. 203D, § 18(a), which creates a statutory
11 The effect of income distributions on Medicaid
eligibility is considered as and when the income is available
for distribution, and is not at issue in this case.
12 As noted above, see note 8, supra, principal could be
distributed to beneficiaries other than the grantor. However,
any such distribution would not be available to the grantor, and
therefore would not affect the grantor’s Medicaid eligibility.
11
presumption that any amount received by the trust, not expressly
characterized as dividend or interest income, shall be allocated
to principal. See also Restatement (Third) of Trusts § 110
(2011).
The hearing officer articulated two alternative grounds on
which to rest a conclusion that the trust corpus could be made
available for distribution to the grantor. First, he noted that
Art. SECOND C. allows the grantor to appoint all or any part of
the trust principal to any one or more of the grantor’s issue,
free of trust. See note 8, supra. In the view of the hearing
officer, that would give rise to the possibility that the
grantor could direct conveyance of the trust property to one of
her children, who could in turn convey it to her. Second, the
hearing officer found that Art. NINTH A. allows Roche to compel
the trustee to return her former residence to her in exchange
for assets of equivalent value. See note 10, supra. The motion
judge did not rely on either ground in his order affirming the
hearing officer’s decision, and the defendant does not rely on
either rationale to defend the judgment in this appeal. In any
event, we offer the following brief comment on both arguments.
The hearing officer cited no case in which either rationale was
applied to support a conclusion that assets held in an
irrevocable trust should be treated as countable assets for
purposes of the trust grantor’s Medicaid eligibility, and we are
12
aware of none. As to the first rationale, a provision making
trust principal available to persons other than the grantor does
not by its nature make it available to the grantor, any more
than if the grantor had gifted the same property to such a
person when she created the trust, rather than placing it in
trust. Indeed, the continuing authority of the trustee in
Guerriero to distribute trust principal to beneficiaries other
than Guerriero following Guerriero’s irrevocable waiver of
rights to receive principal did not derogate from the court’s
conclusion that the trust principal should not be treated as
countable assets for purposes of determining Guerriero’s
eligibility for Medicaid benefits. See 433 Mass. at 635. More
generally, for purposes of computing countable assets, Medicaid
does not consider assets held by other family members who might,
by reason of love but without legal obligation, voluntarily
contribute monies toward the grantor’s support.13
Even less persuasive is the hearing officer’s other
rationale, which rested on the grantor’s reserved power to
direct a transfer of assets out of trust in exchange for other
assets of equivalent value. Such an exchange would be
equivalent to a sale of trust assets, with the grantor in the
13 Of course, any voluntary transfer of monies or other
assets by third parties to Roche, whether from distributions of
trust assets or from other sources, would count toward Roche’s
Medicaid eligibility as and when she received them.
13
role of purchaser and the proceeds of the sale nonetheless
retained by the trust as principal. Such a transfer would not
effect any distribution or diminution of trust principal, any
more than a sale of trust assets to unrelated third parties,
followed by a reinvestment of sale proceeds by the trust. As a
practical matter, of course, any assets held by the grantor and
available to exchange for the assets transferred out of trust
would themselves be treated as countable assets (if they
existed).
Contrary to the conclusion of the hearing officer, pursuant
to the terms of the trust there are no circumstances under which
the trustee may distribute trust principal to Roche. The case
is in that respect in contrast to Doherty, supra, in which Art.
XXII of the trust expressly authorized the trustee “in its sole
discretion” and notwithstanding “anything contained in this
Trust Agreement” to the contrary, to “pay over and distribute
the entire principal of [the] Trust fund to the beneficiaries
thereof [including the Medicaid applicant], free of all trusts.”
74 Mass. App. Ct. at 441.
Conclusion. The judgment of the Superior Court is reversed
and a new judgment shall enter reversing the decision of the
hearing officer.
So ordered.