JANUARY 11, 2016 VOLUME 23 NUMBER 2
Jane Murray (not her real name) died in 2003. She had created a number of trusts, including two for the benefit of her daughter Dana. Jane was very worried about Dana’s future, partly because of a long history of drug and alcohol abuse. She included some strong language guiding the trustee about whether and when to make any distributions. She might not have specifically considered long-term medical care, however.
In October, 2013, Dana entered a hospital in Connecticut as a quadriplegic. At the time, the two trusts contained assets of about $1 million, though the money was not actually available to Dana. The trusts were both “spendthrift” trusts, meaning that neither Dana nor her creditors could force any distribution. Both trusts also contained this language:
The trustee shall pay to my daughter or utilize for her benefit so much of the income and principal of her trust as the trustee deems necessary or advisable from time to time for her health, maintenance in reasonable comfort, education and best interests considering all of her resources known to the trustee and her ability to manage and use such funds for her benefits. In exercising its discretion the trustee shall bear in mind that my daughter has suffered severely from alcohol and drug abuse and that I do not want these trust funds to be used to support a drug or alcohol habit or any other activity which may be detrimental to her in the trustee’s sole opinion.
My daughter’s health, happiness and best interests are to be considered foremost in priority over those who will receive the remaining trust funds on her death. Subject to the above considerations the trustee is encouraged to be liberal in its use of the funds for her even to the extent of the full expenditure thereof.
Clearly, Dana’s trusts would be quickly exhausted on her medical care unless she could qualify for Medicaid assistance, and she had inadequate funds from other sources. Could the trustee simply refuse to make distributions for medical care? Would the trust’s assets be counted as available resources for Medicaid eligibility purposes?
In order to address these concerns, the trustee (in Florida) sought to “decant” Dana’s trusts into new trusts with more explicit language about her long-term care costs. Florida law permits such trust modification, and spells out exactly how it can be done, and the trustee followed the law’s directions. The changes were submitted to a court in Florida for approval, and Dana signed a form giving her consent to the decanting.
The two new trusts for Dana’s benefit included language that clearly made the trust assets unavailable for Medicaid eligibility purposes. In that way, the trusts could be preserved to pay for extra or supplemental needs for Dana’s benefit, permitting her to have a better quality of life. The new trusts, and the history of the decanting, were given to the Connecticut Medicaid office for review.
Shortly after the decanting was completed, an attorney for the Connecticut Medicaid office decided that Dana’s trusts were originally “general support trusts”, making them available resources for Medicaid eligibility purposes. To make matters worse, Dana’s consent to the decanting amounted to a transfer of resources for less than fair market value. That would mean that Dana was ineligible for Medicaid assistance with her long-term care needs until 2021.
After an unsuccessful appeal through the Medicaid agency, Dana filed a lawsuit in Connecticut Federal District Court. She asked for a preliminary injunction prohibiting Medicaid from suspending her benefits, and a permanent order finding that the trustee’s decanting should not be counted as a gift by her.
The federal court ruled on the preliminary injunction question last month. It is only a preliminary ruling, and it is only one trial court — and therefore not of much use to establish precedent. It does, however, suggest how courts might view similar actions in other cases.
The judge hearing Dana’s case decided that there was a high likelihood that Dana will prevail when her case finally does come to trial. If the Medicaid agency were to be allowed to suspend her benefits in the meantime, the damage to her would be irreparable. Accordingly, he ordered that Dana will continue to receive Medicaid benefits while her case proceeds.
Even though we will probably not know the final outcome of Dana’s case for months (or perhaps even years), there are some useful lessons to be learned:
- Inclusion of specific “special needs” language in virtually every trust might make sense. Dana’s mother knew that Dana had problems, but apparently didn’t consider the possibility that Dana might end up in a long-term care setting. A single paragraph expressing her wishes for how the money was to be used in such an event would probably have prevented the current dispute, allowing Dana to easily qualify for Medicaid assistance.
- Decanting a trust in one state but having an effect in another state, while legally permissible, can lead to confusing results. One problem in Dana’s case was that Connecticut law on the interpretation of the original spendthrift trusts, and the ability to decant the trusts, was different from Florida law. That is not a reason to refrain from using local law, but just a caution that it might make sense to take extra care when multiple states are involved.
- State law on decanting might require the consent of the beneficiary, or make it easier to complete the process, but it will generally make sense to avoid having beneficiaries consent. Although Dana’s agreement to the decanting was clearly not a “transfer of assets” as the Medicaid agency’s lawyer suggested, it did give him something to raise as an objection.
- Though interpretations by the Social Security Administration usually are followed by state Medicaid agencies, that is not always the case. In Dana’s case, the Social Security rules clearly provide that her mother’s trusts would not be treated as an available resource. The Medicaid agency here disagreed.
Simonsen v. Bremby, Southern District of Connecticut, December 23, 2015.
The bottom line: trust law and Medicaid eligibility law often have uncomfortable intersections. Slightly different circumstances and different states can lead to big differences in outcomes.