08/01/2017
Recent Supreme Court Decision on Trusts
In December 2015 at the Lawrence Superior Court two cases were decided that cast a dark cloud over anyone who has placed their home in an Irrevocable Trust. The Judges at the Lawrence Superior Court sided with MassHealth (Medicaid in Massachusetts) that everyone who has placed their residence in an irrevocable trust and continued to live in that residence makes the home a countable asset, therefore NOT protected from nursing home costs.
Both of these cases ended up going directly to the Massachusetts Supreme Court and bypassed the Appeals Court. The Supreme Court said that, NO, just the fact that you continue living in your home rent free after you place it in a trust, does NOT make the home countable.
That was great news, BUT, the Court did not stop there. They wrote a rambling 30 page decision talking about how MassHealth was designed for people who had no assets, that the Medicaid budget is the 3rd largest in the Federal budget (23% of the Commonwealth’s budget) and that it is expected to grow by 50% within the next 10 years. Then the Court started questioning other provisions of the trust that were not part of the law suit. They ended up remanding the case to MassHealth to look at these other two provisions that are common in most irrevocable trusts:
1) The trust can appoint trust property to a non-profit organization that is not controlled by the Donors. In plain English, this means the Trustee can give assets to non-profit organizations. The reason that this clause is in virtually every irrevocable trust out there is for tax reasons. This clause allows you to take the $500,000 capital gain exclusion ($250,000 if single) upon the sale of your home that is in the Trust.
The Supreme Court referred to the “any circumstances test”. This principal stands for the idea that if there is any circumstances that income could be paid, then the income is countable, and if there is any circumstance where principal can be made to the Donor, then the principal is countable.
The Supreme Court said to MassHealth “Because approximately 25% of the nursing homes in Massachusetts are operated by non-profit organizations…..it is appropriate for MassHealth to consider whether this possibility exists within the “any circumstance test”.”
It does not matter if you happen to be in a nursing home not operated by a non-profit, only that you could end up in one. . Here the Court was basically telling MassHealth that under this “any circumstance” test, this clause could possibly make all the assets countable because you could appoint the property to a non-profit organization.
They cited an example of a trust issued by Federal regulators: the trust said the Donor could not receive any payments unless he needed a heart transplant. Under the any circumstance test, he could need a heart transplant in the future and because there could be a circumstance where the money could be paid, the trust was found to be fully countable
2) Living in the home owned by the Trust rent free. The Court had decided that just the fact that you live in the house rent free does not make the house a countable asset. They said that it is more like an income interest and because some of the programs operated by MassHealth are income based, the Court recommended to MassHealth that they take a look at this also.
The Court said “Such payments…may affect how much the applicant is required to contribute to the payment for that care.”
The Supreme Court remanded the case to MassHealth “to evaluate two other possible sources of countable assets”, based upon clauses in the trusts that are common in most trusts.
The fallout from this case is now starting to emerge. MassHealth appreciates the help the Court gave them in finding new ways to attack Irrevocable trusts. I am working on a hearing now where the power to appoint to a non-profit has been raised. A fellow attorney has a case where MassHealth has taken the position that the fair rental value of the house is being considered income to the Grantor and that when multiplied by the Grantor’s life expectancy, the Grantor is treated as owning a large portion of the Trust. I don’t see that position as being reasonable.
To make matters even worse, MassHealth is citing the case of Estate of Braiterman, 169 N.H. 217, 145 A.3d682 (2016). This is a New Hampshire case that says if the Grantor retains the power to remove and replace trustees and has the power to change the beneficiaries of an irrevocable trust, that the Grantor has too much control over the trustee and the entire Trust was deemed countable. The power to remove and replace trustees and the power to change the beneficiaries of the trust are common clauses found on most trusts of this type.
It will be a while before we understand how the courts will deal with these issues. I’ll let you know how it turns out.
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 as the President of the Friends of the Saugus Senior Center and is an active 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.
