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July 2, 2009
IRREVOCABLE TRUST DEEMED NOT TO PROTECT ASSETS FROM NURSING HOME
Many seniors place their assets in trust, hoping that if they ever need nursing home care, their assets will be protected and pass to their family, free and clear. Last month, a woman from Andover, learned that her trust would not provide the protection that she had hoped for.
On June 18, 2009, the Massachusetts Superior Court decided the case of Doherty v. Director of Medicaid (Mass. App. Ct., Essex, No. 08-P-939). More than 5 years ago, Muriel Doherty, placed her home into a trust that said “under no conditions were the trustees to make distributions of principal to Muriel”. If that was all the trust said, Muriel would have been OK. Typically, when the grantor no longer has access to the principal, the trust assets are not countable for MassHealth (Medicaid in Massachusetts).
At first blush, this case seems like a slam dunk for Muriel, because the trust clearly prohibits distributions of principal to Muriel. Her problem was buried deep in the “boilerplate” standard language seen in many trusts. Under Massachusetts law, any provision, such as the prohibition against distribution of principal, may not be read in isolation, but rather “construed and qualified in light of the instrument as a whole.” And when you read the instrument as a whole, the following discretionary provisions sank Muriel’s trust:
Trustee’s Discretion #1
- Ability To Terminate Trust – Muriel’s trust, like many other
trusts, allows the trustee to terminate the trust when the value of the
assets become so small, it’s not worth the expense of maintaining the trust.
In Muriel’s trust, this type of termination resulted in the distribution of
“the entire principal of the Trust fund to the beneficiaries”. MassHealth
and the Appeals Court determined that Muriel could be one of the
“beneficiaries”, thereby treating Muriel as the owner of the trust assets
and not eligible for MassHealth.
Trustee’s Discretion #2 –
Ability to Reclassify Income
- Muriel was allowed to receive
income, but not principal. This is standard in what we call an Irrevocable
Income Only Trust. When a beneficiary qualifies for MassHealth, the
principal is protected, but the income must be paid to the nursing home.
Muriel’s trust allowed the trustees the full discretion to determine what is
income and what is principal. Because the trustees could determine that
all of the assets of the trust are “income”, allowing them to legally
transfer all the assets to Muriel as the income beneficiary, the result is
that all of the assets of the trust are countable.
The use of trusts to protect assets of the elderly is like a chess game. On one side you have the estate planners, working to protect the assets of their clients, and on the other side, you have the regulators and legislature constantly making changes. Although the Court in the Doherty case ruled against Muriel, they did state that properly drafted trusts will continue to protect the assets of the elderly.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Friends of the Saugus Senior Center and is a member of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions, please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org