Court Ruling on Special Needs Trust Does Not Resolve Medicaid Eligibility

APRIL 22, 2013 VOLUME 20 NUMBER 16
This week we bring you a story that is simultaneously simple yet profound. It involves an arcane corner of law — the intersection of trust administration and Medicaid eligibility. Its simplicity is obvious: it results in a court determination that Medicaid eligibility is determined by the state Medicaid agency and not (at least not in the first instance) by courts. Its profundity is a little less obvious.

“A.N.” is a seventeen-year-old girl, living in New Jersey. She suffers from quadriplegic cerebral palsy, and she requires full-time total care. She gets most of that care from her mother and her maternal grandmother. She is the beneficiary of a special needs trust, established in 2000 with the proceeds from a personal injury lawsuit. Her father is employed, and she is therefore covered under his employer’s health insurance plan. Although the trust was intended to allow her to qualify for New Jersey’s Medicaid plan, she has never applied and has not yet received any coverage under Medicaid.

Her mother owned the home where A.N. lives, but she got behind in making payments on the mortgage. At some point the house was about to be foreclosed, and both parents asked the trustee of the special needs trust to begin making mortgage payments. The trustee did, but asked that the home simply be transferred into the trust’s name — there was little equity, and it appeared to be in A.N.’s best interests to make sure that foreclosure would not be a problem in the future.

It also seemed important to get specific authorization to pay A.N.’s mother and grandmother for taking care of her. Normally, that is the responsibility of a parent — but A.N. received her personal injury settlement (in part) precisely because her care is much more extensive than the care required for other minor children, and her mother is unable to work outside the home to support her — and could never make enough income to cover the cost of the care she is already providing.

Thus far the story is familiar. Though we know nothing much about New Jersey cases, we have heard versions of this story many times. Parents faced with extraordinary caretaking requirements for profoundly injured children, large personal injury settlements that could be used to help cover the high costs of care, houses that lost value during the recent downturn in the real estate market, and special needs trusts intended to maintain eligibility for Medicaid and Supplemental Security Income benefits are all too common in our practice. The only thing unusual in A.N.’s story is that Medicaid is not currently in place — but even that does not change the fundamental questions raised by her case.

This is the dilemma faced by so many trustees and families: should A.N.’s trust purchase her mother’s home, and reduce the cost of living there (because there would not be a mortgage for the mother to pay)? If so, should A.N.’s mother be required to pay rent, either for herself, or for A.N., or for any other children or adults who live in the house? And should A.N.’s mother and grandmother be paid to care for her, even though the law imposes a general responsibility on parents to provide care for their minor children? Finally, what effect would any of those decisions have on A.N.’s eligibility for Medicaid, and who gets to decide that effect?

Because the questions are difficult and the dollar amounts significant, the trustee of A.N.’s trust properly asked the court to make the final decision. The court, after all, is responsible for ultimate oversight of trusts, and this trust was already receiving the court’s attention (it had been set up by court order, after all). The court, in turn, appointed an attorney to represent A.N.’s interest; she argued that buying the house, foregoing rent and paying A.N.’s mother were all in A.N.’s best interests. After hearing the evidence and arguments, the court agreed.

The trustee had given notice of the pending court proceeding to the state Medicaid agency. While the court was considering the final language of its order approving the transactions, the Medicaid agency weighed in with its own comment. In effect, it told the court: “go ahead and decide that it’s in the child’s best interests if you like. But don’t think you can make us later agree that there will be no effect on Medicaid eligibility.”

The Medicaid agency pointed to a section of federal law (arguably not applicable to A.N.’s trust or her prospective future eligibility) that requires that trust distributions be for the “sole benefit” of the beneficiary. In this case, said New Jersey’s Medicaid agency, the court might well determine that the distributions are in A.N.’s best interests, but they benefit A.N.’s mother and grandmother, too — and they might run afoul of the “sole benefit” requirement. But we don’t have to decide that right now, said the Medicaid agency. We’ll wait until someone applies for Medicaid and let you know what we think then.

Not wanting to leave the issue dangling, the court specifically ordered that the proposed payments were for A.N.’s sole benefit. Furthermore, ruled the court, the Medicaid agency could not later object to the payments if anyone made an application for coverage for A.N. The Medicaid agency, not wanting to be bound by the court’s order, formally appeared in the case for the first time just to appeal that result.

The Appellate Division of the New Jersey Superior Court (the intermediate appellate level in New Jersey) agreed with Medicaid. Fine for the trial court to give the trustee directions, said the appellate judges. Fine to decide the payments are in A.N.’s best interests. But you don’t get to decide Medicaid eligibility questions. The agency makes those determinations in the first instance, and if someone appeals, then and only then can the courts get involved. In the Matter of A.N., April 16, 2013.

So what does that mean for Arizonans, for trustees of special needs trusts and for families? A number of lessons can be gleaned from the holding:

  • State Medicaid agencies are not necessarily bound by court interpretations of trust rules, even if they have advance notice of the pending court resolution. The Medicaid meaning of a phrase like “sole benefit” — and, for that matter, its applicability — is first a question for the agency.
  • What is best for a trust beneficiary might not also be the most effective for Medicaid purposes. It’s hard to see how allowing A.N.’s mother to lose her house could ever be in A.N.’s best interests — or even how it could be tolerable. But it doesn’t follow that Medicaid eligibility would be easy to resolve.
  • Medicaid eligibility is typically more restrictive than private insurance. It’s a very good thing for A.N. that her father continues to be covered by his employer’s policy. Time and again we see parents who are locked in to a current job situation precisely because of insurance coverage like A.N.’s father’s.
  • Though unspoken in the New Jersey appellate decision, the effect of the Affordable Care Act (“Obamacare” to both supporters and opponents) will be profound in some special needs trust cases. If A.N.’s trust can purchase insurance equivalent to that provided through her father’s employer, the entire family’s options (and the court’s ability to supervise the trust effectively) will be enhanced. We do not yet know whether that possibility will be completely or even partially realized.

Would the same procedural result be reached by Arizona courts in similar facts? We do not know for certain, but it seems likely that it would. But we are confident that the profound questions — about how to balance parental responsibility for food, housing and care with the availability of significant trust assets in similar circumstances — will continue to challenge us in the administration of special needs trusts.

 

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