Heyn v. Director of the Office of Medicaid, Mass. Appeals Court (Opinion No. 15-P-166), 2016 WL 1466564, April 15, 2016 (Roche case in lower court and Fair Hearing)
In a much anticipated decision, and in the face of many contrary Massachusetts fair hearing and court opinions in this area of the law, a Massachusetts Appeals Court overturned a Superior Court and Fair Hearing Decision that concluded that assets contained in an irrevocable trust were countable for MassHealth purposes.
The facts of the underlying case are as follows: Everlina Roche resided in a skilled nursing facility from November 4, 2011 through her date of death on August 25, 2013. She established an irrevocable trust eight and one half years earlier, transferring her home into the trust and retaining a life estate. Her MassHealth application, although initially approved, was terminated due to the treatment of her former residence as a countable asset (valued at $214,423), thus causing her to exceed the maximum resource allowance. Roche appealed and lost on appeal in a decision dated June 20, 2103. That decision was upheld by the lower court in a decision dated October 8, 2013. Ms. Roche died on August 25, 2013, and the Personal Representative of her estate continued the appeal to a Massachusetts Appeals Court. In the fair hearing decision, the fair hearing officer reasoned that trust authorized the trustee to sell trust assets, and to invest trust assets in any form of investment, including annuities. Since the trust also authorized income payments to Ms. Roche, the hearing officer concluded that annuity payments resulting from the annuity purchased by the trustee with trust principal could be distributed from the trust as income, and thereby made available to support Ms. Roche. The Massachusetts Superior Court upheld the fair hearing decision, and this appeal followed.
In an interesting footnote in the decision (see footnote 3), the court notes that MassHealth did not argue the retained life estate could have a value for Medicaid purposes that would affect eligibility in this case, even acknowledging that it is “a correct statement of the law under Cohen v. Commissioner of the Division of Medical 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. This is rather significant given the recent position taken by MassHealth regarding life estates (see Daley and Nadeau cases, wherein the agency took the position in both cases that the retention of a life estate rendered the home a countable resource even though the home was placed into the irrevocable trust in those cases).
It is important to note now, as it was then in the Doherty v. Director of the Office of Medicaid, 74 Mass. App. Ct. 439 (2009) decision that began a continuous string of decisions from Massachusetts, that the Heyn court specifically made the point that a properly structured irrevocable trust may be used to place assets out of the control of the grantor and that such assets would have no effect on the grantor’s eligibility for Medicaid benefits:
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 v. Commissioner of the Div. of Med. Assistance, 433 Mass. 628 (2001), at 633. See also Doherty, supra at 442-443.
As is often the case where the question of the countability of assets contained in an irrevocable trust is at issue, the Heyn court discussed the OBRA ’93 changes to 42 USC Section 1396(d)(3)(B), which states that countable assets include any portion of the trust principal that could “under any circumstances” be paid “to or for the benefit of” the grantor. The Heyn court noted that under that provision of federal law, it is irrelevant whether such circumstances have actually occurred, or even if they were imminent, in order for trust assets to be considered available. It is enough for purposes of this provision that the assets could be made available to the grantor.
The court then proceeded to apply the “any circumstances” test to the trust at hand using the principle that it must look at the trust as a whole (a similar approach was used in the Doherty case, and the Heyn court notes that point in the opinion). Under Article Second of the trust, quarterly distributions of trust income were required during Ms. Roche’s lifetime. Principal of the trust could be distributed to persons other than the grantor. The trust also contained a lifetime limited power of appointment in favor of the grantor’s issue.
The court then analyzed Article Eight, which granted broad authority to the trustee to deal with trust assets, including the right to sell assets and then invest the sales proceeds 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.”
Finally, the court noted that Article Nine of the trust contained the power to substitute assets of equivalent value, a commonly used grantor trust provision. This power to substitute was held by the grantor in a nonfiduciary capacity.
At the fair hearing level, the hearing officer concluded that the above provisions would allow the trustee to sell the subject real property, invest the proceeds in an annuity, and then treat the resulting annuity payments as income that could be paid as a distribution to the grantor. The Heyn court noted that this analysis represents a misunderstanding of the nature of annuity payments, since a portion of each annuity payment represents income, and the other portion represents a return of principal. Only the income portion of each annuity payment would be considered available to the grantor in this case, with the portion allocable to principal remaining in the trust as protected principal. The trustee’s authority to allocate as between income and principal does nothing to affect this conclusion because that authority is expressly constrained by reasonable accounting principles and practice and state law. Under Massachusetts state law, any amounts not expressly characterized as dividend or interest income is allocated to principal.
With regard to the hearing officer’s conclusion that the limited power of appointment rendered trust assets available, based upon the possibility that the power could be exercised in favor of one child, who in turn could convey the asset to the grantor, the Heyn court did not agree with this conclusion, stating that “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.”
The Heyn court found even less persuasive the hearing officer’s conclusion that the grantor’s reserved power to substitute assets of equivalent value rendered trust principal countable for MassHealth purposes, describing that scenario as tantamount to a sale of trust assets, with the assets received by the trust becoming protected trust principal.
Based upon all of the foregoing, the Heyn court concluded that there were no circumstances under which trust principal could be made available to or for the benefit of the grantor, Ms. Roche, and the decisions of the hearing officer and that of the lower court were reversed.
The Heyn decision is an extremely important court decision in Massachusetts in light of a long line of fair hearing decisions and court decisions holding that the principal of irrevocable trusts are countable for MassHealth purposes due either to retained grantor trust powers or a retained life estate in real property.