The Treatment of Irrevocable Trusts in Massachusetts by MassHealth After the Daley and Fournier Decisions

MassHealth lawyers have made arguments in the past that if you place your home in an irrevocable trust but still reside in your home then the asset is countable when it comes to MassHealth qualification. They have also concocted ways that trusts could be abused so that the elderly person can “have their cake and eat it too.” The Supreme Judicial Court decisions in the Daley and Fournier cases squashed most of the MassHealth lawyers’ arguments. Join us for a discussion about how the treatment of irrevocable trusts in Massachusetts by MassHealth has changed following the Daley and Fournier SJC decisions. We will be joined by our guest speaker Attorney Nick Kaltsas from Elder & Disability Law Advocates in Worcester. In this webinar we will be covering:

– Can residing in your home after you deeded the home to an irrevocable trust cause your home to be treated as a countable asset in the MassHealth application process?

– If your home is in an irrevocable trust will you be able to qualify for MassHealth?

– What arguments are no longer available to MassHealth lawyers after these SJC decisions?

The opinions expressed in this webinar are the opinions of Attorney Brian Barreira and Attorney Nick Kaltsas on the law as written as of the date of the webinar recording, October 21, 2021. The information presented in the webinar is for informational purposes only, and is not a substitute for individualized legal advice.

Webinar Transcript

Brian: So we’re going to get started, hi I’m Brian Barreira, lawyer in Plymouth and with me today is Nick Kaltsas who’s an elder law attorney in Worcester. Thanks for joining us today Nick. We’re going to talk about irrevocable trusts. There have been a number of cases in the last seven/eight years about how a trust works and when does the trust fail if you do it to try to obtain MassHealth benefits later on. And you know, we may be at a crossroads where most of the arguments against trusts have been rooted out by the by the court system. So we’re going to start, talk about before the Daley case which was I think in 2017 I think that’s when it came out. There are a number of arguments that MassHealth lawyers started making against trusts. First of all, they made a lot of two-step arguments where, well you the trustee could do this you could buy this kind of investment you could buy an annuity and then they would be treated as the income of the person who set up the trust, or you could make other investments and get the money out, or you could give the money to the kids and then the kids could take could give it back to you, or spend it for you. So, those were the kinds of arguments, the two-step arguments, they were making and then they spotted a regulation at some point that they didn’t understand because there was a new crew of lawyers involved in MassHealth at that point. Now back in the late 80’s early 90’s you could put your home into a revocable trust. It would not be treated as a gift and yet it wouldn’t be treated as your home if you applied for MassHealth. So you could essentially use a revocable trust to try to preserve your home. So there was a regulation that changed that to take that away that said, ‘a home that’s available under the terms of the trust is a countable asset’. Now available meant if it could be given to you and their regulations explain that because there was a definition of what the word available meant. Well, these clever lawyers who were working on the changes to the MassHealth regs stripped the definition of available from the regulations and then they started arguing if you could live there it’s available to you, doesn’t matter if the trustee can give it to you, it’s available and therefore it’s yours and it’s all countable. And that’s where Daley stepped in, Nick had a client, last name Daley, who was affected by this and Nick wasn’t gonna take it sitting down.

Nick: Yeah you know I thought, I thought that the Daley case when I initially saw them in 2007 was, you know, a particularly straightforward case. These people were interested in protecting their home in the event one of them would become ill and require long-term care, so you know, the remainder interests in their own life estate and the remainder interest was put in the irrevocable trust. Yeah, I didn’t think much of it at that point, I thought it was pretty straightforward and they wouldn’t have any problems with MassHealth. At that point I hadn’t realized that MassHealth likes to make the very same arguments over and over again regardless of what the courts say, they’re a little bit more attentive if it’s an appellate court or of course an SJC, a Supreme Judicial Court opinion, they’ll pay far more attention to it. But, in the event it’s a trial court case, a superior court case, they uh I don’t think they pay any attention to what the judge does at all unless it’s in their favor then they’ll argue it over and over again. So, Mr. Daley gets sick goes into a nursing home in December of 2013, it’s a long time after the drafting and the execution of their trust, in fact just over six years. A couple months later they put in an application for long-term care benefits. The application is denied by MassHealth, I think that they primarily, they threw everything up against the wall, they wanted to deny it for basically whatever reason they could, but the primary reason was because of their argument that, ‘hey, the assets in this trust can be converted into an annuity and the annuity payments paid to the settlers of the irrevocable trust’, they also relied specifically on a regulation that had to do with the availability and the accessibility of the home even though they held a remainder interest, they wanted to count the entirety of the corpus of that home, the value of that home, as a countable asset that pushed them over the two thousand dollar threshold. Now, we went to fair hearing, we appealed the denial. The fair hearing of course the officer for the fair airing is an employee of the state, supposed to be impartial, and I don’t know maybe he thought he was being impartial, I wasn’t too happy with his decision. He upheld the denial. The application was filed in 2014, February of 2014, denied two months later, appealed April 2014, so a couple months later after the application, immediately after the denial and the fair area occurred in June of 2014 and October 22nd the decision of the fair hearing officer was issued upholding the denial. The predominant reason that the trust assets were found countable was because Mrs. Daley, who you know obviously was the spouse of the institutionalized individual, was allowed to live in the home. The idea that assets could be converted to an annuity and annuity payments made to the Daley’s did not seem to hold a persuasive argument for the fair hearing officer but he went with the availability of the home because they lived in the home. So, we went to the SJC, the Supreme Judicial Court, and argued that the mere fact that a retained interest was maintained by the Daley’s did not mean that the remainder of interest that was put in the trust was countable in determining eligibility for Mr. Daley. And the SJC agreed that the mere fact that you’re able to live in the home because you’ve maintained a life estate doesn’t make it countable in determining eligibility for MassHealth. And if you think about it, you know it is a well-reasoned decision, they relied a lot on real estate law and the fact that you’re able, because of a life estate, to live in the house doesn’t mean you have control over the entirety of the home. So you equate it more or less to an income interest in the home, but in any event they said you can’t count the principle of the home in determining eligibility. That was pretty much what the Daley case indicated.

Brian: Okay, and then the court, there were two cases in Daley, you know there was another case, Nadeau, and the court looked at that trust and saw something that had never been mentioned at any time in the history of the case until that point. It was a power that a lot of us who draft these trusts put in what’s known as a power of appointment, a limited power of appointment where you can change the inheritance provisions in some way; you can’t take it back can’t give it to your own estate but you can adjust. But in order to to be able to sell your home when it’s in the trust and get your $250,000 capital gains exclusion, you need a power over the principle of the trust, and what many of us had settled upon was you keep a power to make gifts to charity. And the way it was worded, in some of these is the power to make gifts to non-profit organizations. So the court looked at that power, no briefing at all had occurred, and saw that you could technically give your home in the trust to a non-profit organization. Then they checked and found that a good 40% of the nursing homes were run as non-profit organizations, so the SJC then said, told the agency, ‘Look at this! We’re sending it back down we want you to look at this and see if that’s a way that you could benefit from the trust, you could just give everything, you could pay for your care at a nursing home that’s run as a non-profit’. It was a loophole, so the court came up with this, we wrote, Nick and I wrote in and asked that the court take that out and reconsider it because you cannot use a power of appointment for your own personal benefit, that’s always been the law. So, but the court refused to budge, let it go back down and many cases were won on that point by the appellants, by the people who had done the trusts. So eventually it got back up to the SJC in the Fournier case. So the court looked at that argument and essentially said, ‘What a ridiculous argument’, it was their own argument! It was their own point that they raised and insisted on leaving in the Daley opinion and now they’re saying, ‘Wow that’s not-, that’s a silly reason to disqualify a trust’, so they-, there was about four years of litigation about that issue, all kinds of fair hearings and Superior Court cases and eventually they-, so they, so Fournier is really part two of Daley.

Nick: I mean I can understand if they want to make the argument, general power of appointment versus a special power appointment and if you maintain a general power of appointment, you know, causes countability of trust assets because you’ve retained the ability under the general power of appointment to distribute the assets even to yourself if you see fit, whereas in the special power of appointment, you can’t give it back to yourself.

Brian: Yeah, you have a narrow group that you can choose from and that doesn’t include you or your spouse.

Nick: Right

Brian: With this, with the kind of limited power of appointment we’re talking about. So, you know the court made the-, caused the problem for four years and then dismissed it as, ‘wow that’s a silly argument’, but what we got out of the second decision is what we were trying to get them to say in the first one; there has to be a direct path of the principal from the trust to the person who’s applying for MassHealth.

Nick: And I think that court said that beautifully in response to your arguments in the SJC for the Daley case, I mean you know that was abundantly clear I think.

Brian: But then they but they never came out and said it in Daley, they came out and said it in Fournier.

Nick: Right, right, right.

Brian: And I think that pretty much destroys most of their arguments. So when they looked at that that decision, there was another case down below waiting, it was percolating in the appeals court called Brisebois, and they just tossed their hat in, they just gave up. Their argument there was, you could give assets from the trust to your children then the children could pay for you, the two-step process that they had-, they’ve been making for almost a decade. So that Fournier case really shut down most of their arguments.

Nick: I mean I don’t know do you remember that when they were really making that step argument, did you used to tell your clients if you’re going to make some kind of a transaction you need to make sure that it’s not too close, not to approximate in time to the first step, you’ve got to wait a long period of time before you do another transaction. So, you can go into court and avoid this step argument because they really did like to bring that argument.

Brian: Right, and I don’t think that argument is completely dead, there’s a case in New Hampshire called Breiterman where it was a trust that said you could make distributions to the children out of the trust and then it had language that said ‘I don’t impose any obligation but I hope they’ll use it for me if it’s given to them’. Now that was language that the court relied on, so what the family was doing is they were-, mom was in assisted living, they would give just enough money out to a child to pay for assisted living that month-

Nick: right

Brian: -and then the child would make the payment. So they created they created a path, they made it obvious what they were doing. I would have said give that kid enough to pay for a year, I wouldn’t have made it a monthly thing if we’re going to do a side door kind of thing.

Nick: You know the other thing I think was a real killer in Breiterman was the trustee was allowed to make any distribution or to make distributions and categorize them either as income or assets, they weren’t confined to generally accepted accounting principles it was at the pure determination of the trustee whether to categorize something as income or asset and I think right there they lost.

Brian: Breiterman or Doherty which sounds

Nick: I think that was also in Breiterman

Brian: Well I’m not sure that was in Breiterman because I know that that was a trust that one of my first versions of the irrevocable trust and so New Hampshire lawyers had, I had given it to them, so I don’t think it was, I’m not sure it was in there but who knows that that was probably in 1990 or so.

Nick: Yeah I’m pretty sure it was very it was

Brian: But in Doherty there was definitely was a problem in the Doherty case that caused all this mess. In 2009 the Doherty case, it said you could do whatever you want, you could call it principal, you could call it income, well if the typical thing in these trusts we’re putting the assets between the generations the parents who set up the trust have the right to the income or the right to use of the of the property, not to be owners but to use. The principle remains in the trust. So if if you get this definition that allows you to merge these two and call principal income and that that really becomes a problem.

Nick: Yeah, big problem. You know the argument that has been repeatedly made by the agents, by the AG’s office, attorney general’s office, that and even I guess the executive office of Health and Human Services in arguing for MassHealth that special rules apply to them, the law of trust or the law of real estate doesn’t apply to them; a special accommodation needs to be made for them so that they can enact Medicaid policy? Just pretty much is dumbfounding to me.

Brian: Well and I think the court went out of its way in Fournier to say, ‘you gotta follow Massachusetts trust law’ that’s-, see I think in a way the court did us a favor by leaving that issue open in Daley and having to come back because they then had more of a view of what this agency was doing and they really just threw the book at them.

Nick: I specifically recall Judge Gantz sitting on the bench saying that to the AG’s office, ‘I get it, I understand you know and I feel for you, but when certain laws are passed whether it be federal law or a state law you can’t just’, and I remember he put his fingers up and went, ‘you can’t just thumb your nose at it you have to apply the law’.

Brian: And that’s not what they were doing.

Nick: yeah

Brian: So the the other things, a couple of other things that Brisebois, which they gave up on, down below they had argued that if you could be a trustee then you can charge fees and you can charge fees from the principal of the trust and you can charge unreasonable fees and therefore the whole trust fails. They drop that argument when they drop Brisebois, that doesn’t mean they’re not going to keep bringing it up that just means they didn’t go forward.

Nick: You know I want to talk just a tiny bit about Hirvi-

Brian: okay

Nick: -another case that was in the Suffolk Superior Court. You know, I think that MassHealth in the AG’s office as a result of this flew of litigation that has occurred and you know I mean I hate to say but it’s kind of like they’ve been taking it on the chin in many of these cases, entered into an agreement in the early case and I think many, many of the arguments that we’ve seen regurgitated over and over again, kind of like they take one bite out of the apple and two bites out of the apple and they’ll just keep eating the apple until they eat the core, will no longer be argued, they’re going to have to come up with other arguments. I don’t think that they are going to just regurgitate the same things over and over again. Might take a year or so or you know that period of time before this runs its way through the we’ll call it the executive branch but the way I view it is, there was some tension between the executive branch and the judicial branch and I think now that the executive branch, the AG’s office, is going to be more compliant with what the judicial branch has issued in this Aquarius.

Brian: and I think I think they got the the news when Fournier came down then they dropped Brisebois, I think that they’re not gonna go forward with those kinds of arguments anymore. They do have a form that they were using so that if you applied for MassHealth the the worker, the eligibility worker which would send the trust along with the form for the, for legal advice and they had a checklist of what was wrong with the trust; and I’ve done a freedom of information act request and they haven’t updated it yet but I’m going to keep on that and find out what their checklist looks like because that indicates what they’re looking for on trusts.

Nick: You know pursuant to Hirvi they’re supposed to make revisions and amendments to that form you’re talking about we’ll see what happens.

Brian: We’ll see. So in the few minutes we have left we might as well get to: Where do we stand with trusts? Why do a trust? I’ll let you start. A trust like this irrevocable income only type trust.

Nick: Well if a trust is written appropriately and contains the language that’s necessary I think that the corpus of the trust, so what’s in the trust, if you comply with the five year look back, it’s still a five-year look back, if you comply with what the law says I think it’s an effective vehicle to shield and protect assets.

Brian: It is but people seem to think that there’s some magic fairy dust that we’re applying here. And that when when you’re shielding it from losing it to a nursing home you’re also keeping it away from yourself so there’s that inherent conflict of you know, how much do you want to do to protect the inheritance for somebody else.

Nick: And the Daley court did talk about that. That in the event you comply with the law, there’s a five year period of time you have to wait in and on top of that you’re putting the assets out of your ability to get at, so you know there’s give and take here. The federal government recognizes a particular give and take and if you comply with their regulations it’s an uncountable asset.

Brian: So there’s also a chance the federal law changes.

Nick: Yeah no doubt about it

Brian: Always a chance but they still have to rely on state trust law. Alright, so there is a a statute in Minnesota that may or may not be valid, I think it’s being challenged, that essentially invalidates an irrevocable trust if you apply for Medicaid there.

Nick: Yeah so you know the distinction I see is that if they change the federal law we have a problem because a lot of the arguments that we make in court is that the state can’t be more aggressive in finding eligibility than what the federal law agrees to. What the federal law mandates, what’s countable it’s not countable, states can’t go forward and say, ‘hey regardless of what the state said, what the federal government said we’re going to count it’, if they change federal law comes far more difficult in my opinion.

Brian: Well I don’t know how they’re going to change federal law because if you cannot get it back how can it be counted against you? If you’ve given it away already how do you un-give it away? So I think the best thing for people to do is make sure that they’re not playing games and they’re not keeping some way of getting it back, like a side door and a trust where it could go out to children and come back to you, that’s, to me that’s dangerous because it seems to me that they’re going to still be looking at that kind of thing; especially for people who have done it, who have gotten the money out and used it for the parent, I think-

Nick: Yeah hopefully they’ll grandfather these thing if they make a change.

Brian: Yeah but it’s state trust law that matters in the state legislature could make changes to the state law. So the the other kind of trust that we might as well mention, we got like a minute or two to go, is a trust in a will for a spouse. Might as well mention that one.

Nick: Testamentary trust safe haven but of course the assets need to go through probate, probate court has to allow the will that establishes the trust then the funds or the assets need to flow through probate, go into the trust, and the federal law says safe haven, you can’t go after those assets.

Brian: And, and that’s been the law since 1985 and yet a lot of people don’t know about it. So the best situation to use that in is when you know who’s more likely to die first. It only works for married couples so you know who’s more likely to die first you know who’s likely to need nursing home care. So someone with terminal cancer and a spouse with Alzheimer’s, you move the assets to the into the name of the one with the terminal illness, they drop to a probate and trust for the other spouse and you’ve saved assets that way.

Nick: And you know the thing I like probably most about that and I’ve used it a good number of times, MassHealth doesn’t fight you on that. That’s the type of trust that if it’s you know the testamentary trust funded by the will, the assets go through probate into the trust, they don’t try to count it; which is nice because your client gets to avoid litigation costs, which as you can imagine can be fairly expensive.

Brian: But a trust where people try to avoid probate, a trust that you set up-, you can set up the same kind of trust for your spouse; if it’s in your will the assets are protected, if you try to avoid probate with these living trusts that they’re selling at all the seminars MassHealth will blow through that one.

Nick: Yeah the only time I have used a testamentary trust is when it’s crystal clear one spouse is in dire medical straights and their longevity is not going to be an issue, do a trust do the will, have the trust in the will and at least my experience has been it works, it’s very smoothly.

Brian: Very smoothly. Okay, well I think we’ve reached the end of our time we’ve advertised a half hour we’ve done a half hour. We’re gonna do other programs in the future on Medicaid, MassHealth, trusts, so this this is not the end of the webinars. But thank you all for joining and thank you Nick for joining us today.

Nick: Thank you Brian, thank you everyone

Brian: Bye

Nick: Bye, bye