Nursing Home Expense and Irrecovable Trusts

Many people have transferred their homes into irrevocable trusts as a way of making themselves eligible for state assistance if they go into a nursing home. Most know that this has to be done five years before they enter the nursing home. What they may not know, but should, is that MassHealth has been declining benefits to some applicants based on the existence of an Irrevocable Trust, even if the Trust was established and funded prior to the five-year look back period. MassHealth is using an “any circumstances” test to determine if the applicant is entitled in any way to the principal of the trust. If he or she is, MassHealth will decline assistance and the courts may or may not concur, depending on the exact terms of the trust.

The SJC has considered this issue in two cases, overturning the Superior Court decisions which confirmed the denial of benefits by MassHealth. However, in those cases, the Court left open the possibility that other terms of the trust might give the applicant the right to principal from the trust assets which would justify a denial of benefits. Both cases were combined in the Massachusetts Supreme Judicial Court (SJC) decision, Daley v. Secretary of the Office of Health and Human Services and Director of Office of Medicaid, 477 Mass. 188.

In the first case (Nadeau), the home of the applicant had been transferred to an irrevocable trust which trust contained a provision allowing the applicant to use and occupy the residence for life. The Trust provided for payment of income to the applicant- but no payments of principal were allowed. For MassHealth eligibility, payments of income are allowed and are not a disqualifying factor. However, MassHealth denied eligibility based on the “use and occupancy” language in the Trust, and considered the home a “countable asset.” But the SJC reasoned that if the Trust decided to rent the property, the rental payments would be income to the Trust and would then be an income distribution to the applicant. Therefore, the applicant’s use and occupancy of the property would be considered as a distribution of income to the applicant, not principal.

The SJC reversed the Superior Court decision. BUT the Court did remand the matter back to MassHealth to determine if two other provisions of the Trust may fall under the “any circumstances” test. One provision gives the applicant the right to appoint all or any part of the trust property to any one or more charitable or non-profit organizations. The second provision was that the trustee may pay any tax liability from the corpus of the trust arising from distributions of income to the applicant. We will be looking for the decision on these two provisions.

In the second case (Daley), the applicant had conveyed the home to the applicant for life with the remainder to an irrevocable trust. MassHealth argued that the equity in the home was a countable asset. Historically, retention of a life estate in an applicant’s home (established before the five-year look back period) is not a disqualifying event. The SJC held that “where the irrevocable trust does not own the life estate in the applicant’s primary residence, the continued use of the home by the applicant pursuant to his or her life estate interest does not make the remainder interest in the property owned by the trust available to the applicant.”  The SJC reversed the judgment. But like the first case above, remanded the matter to MassHealth for a further determination under the “any circumstances” test with regard to the same provision set forth above about the payment of any tax liability that was incurred as a result of a distribution of income.

As the demand for MassHealth assistance for nursing home costs increase, it appears MassHealth is becoming more stringent in its interpretation of irrevocable trusts and also that the State legislature is inclined to pass laws to make sure the MassHealth system is protected from those trying to “hide” (protect) assets.

There are risks involved when transferring assets to an irrevocable trust to protect those assets. Once assets are in this type of irrevocable trust, the donor has no control in the funds and also has no rights to access the funds. The donor has given up all ownership rights to the assets. Federal and State laws governing the eligibility rules for the agency providing long term care benefits (currently MassHealth) change often. An irrevocable trust created prior to any such changes may not fall within the eligibility rules in effect at the time an application for benefits is submitted and the request for assistance may be denied.  Also, in the event life’s circumstances change and access to these funds would help, such as paying for home care or unexpected health care costs, there is no guaranty the trustee will release the funds.

These are complicated issues and cannot be decided in a vacuum.

We are available to work with you on these complex and important matters.

If we can assist, please call.

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