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Keeping Medicaid Trusts Out of Harm’s Way
How a Trust Protector Can Help (or Hurt)

By Alexander A. Bove, Jr.

Understanding the challenges of drafting a Medicaid trust.

TrustProtector

Drafting Medicaid trusts for applicant/settlors of such trusts may soon qualify as a hazardous duty assignment, if it does not already. That is to say, even though we do our best to remain within the applicable laws and regulations to protect family assets from being consumed by long-term care costs, it seems that in many states, Medicaid authorities are aggressively interpreting and even stretching “the applicable laws and regulations” (as well as provisions of the trust itself) beyond what the y are designed to do in a concerted attempt to place us (and the clients) in a no-win situation. And to make matters worse, the typical Medicaid planning trust is irrevocable, so when a provision is discovered to be subject to an unfavorable or aggressive interpretation by the state, we are between a long-term care rock and an expensive hard place. One of the ideas that has recently surfaced to combat this occupational hazard is the use of a protector in the trust.

Use Caution With Trust Protectors

Briefly, a protector is a party who is granted powers over the trust but who is not a trustee.1 Of course the powers we give the protector, when and how they may be exercised, and whether any limits are placed on them, are vital considerations and can make the difference between eligibility success and total failure of the trust for Medicaid planning purposes. For this reason, practitioners are strongly cautioned not to use just any protector provisions, and certainly not the broadest that they can find. In some cases, the broader the provisions the more fatal it can be for the Medicaid plan. For example, it is not unusual to see a provision allowing the trust protector “to add or delete beneficiaries” or “to amend the trust in any way that is consistent with the settlor’s intentions.” This type of overly broad provision clearly falls under the “any circumstances” rule (see discussion below) and would by its very presence in the trust cause the trust assets to be fully countable, whether or not the provision is exercised.

And Extreme Care

The drafter must also be extremely careful to avoid any language that could be interpreted to allow the settlor to be appointed (or to appoint herself) as protector (or as trustee for that matter), since that would cause all powers to be imputed to the settlor (again, whether or not the settlor actually became the protector (or trustee)).2 Further, perhaps the most important overriding provision when adding a protector in a Medicaid planning trust is the one that absolutely prohibits, under any and all circumstances, the protector from adding or modifying any provision of the trust that would or could, either by itself or in conjunction with any other provision, result in allowing the settlor to have access to or to receive any of the trust principle. This is the “under any circumstance rule,” discussed below.

Once provision is made to unmistakably avoid exposure to the under any circumstance rule, there is a wide variety of provisions that may be helpful. Of course, you seldom know which will be helpful until the circumstances arise that call for such a provision. For instance, the power to change trust situs or governing law, or the power to add or delete a beneficiary (other than the settlor), or a limited power to amend the trust, or the power to grant a power of appointment may all be helpful in a number of circumstances. In those cases, however, you must be sure that the permissible appointees of the granted powers specifically exclude the settlor.

From Time to Time

In drafting your Medicaid planning trust, you may not wish to include every possible provision for a protector at the outset since you will not know exactly what powers the protector may need or whether you’ll need a protector at all. In such cases you could merely include a provision that allows for the future appointment of a protector say, by the trustee or by the individual remainder beneficiaries, “from time to time and under terms and conditions set forth in the appointment,” being sure to add the strict limitations on benefitting the settlor or giving the settlor powers. You should review the regulations and rulings in your particular state to determine whether the local agency has any particular red flags in this area that will affect the particular provisions you have in mind.

Under Any Circumstance Rule

In Cohen v. Division of Medicaid Assistance, which is the landmark case that reviewed and confirmed the under any circumstances rule, the Massachusetts Supreme Judicial Court held that if there is a “peppercorn” of discretion that enables benefits to be paid to or for the applicant, then all of the trust assets subject to that discretion, however remote it may be, will be deemed available as a resource to the applicant.3

In its opinion, the court referred to the regulation and accompanying example contained in the State Medical Manual.4 That example poses a trust that would only allow trust benefits to be paid to or for the applicant if the applicant needed a heart transplant, but in that instance the trustee could then distribute all the trust assets for that purpose. Since there was a circumstance, even though remote, where all the trust assets could be distributed to the applicant, then this provision would make the trust assets fully countable under the any circumstances rule.

So, practitioners should avoid clever drafting schemes that they think might circumvent the under any circumstances rule, but of course even that rule has limitations. For example, the rule should not be applicable to the situation where a trustee (or protector) exercises a special power of appointment and appoints trust assets to a party other than the settlor (say to a child of the settlor/applicant). In such a case, the government should be prohibited from applying the rule, arguing that the child could later gift the appointed assets to the parent. Except perhaps in a case where the family demonstrated a clear pattern of such behavior, the argument is plainly unsupportable on the basis that the rule specifically applies to payments “from all or a portion of the trust,” and the Cohen decision makes it abundantly clear that the potential discretionary payments must be available under the terms of the trust.

Section 411 of the UTC

Despite that reasoning, however, there is one other important issue relating to the under any circumstances rule, but on which almost nothing has been written about and even then, it appears that no one has taken notice. If the Medicaid agencies do take notice, however, it will immediately take priority as a drafting issue in Medicaid qualifying trusts. The issue is the application of Section 411 of the Uniform Trust Code (applicable, of course, only to those states that have adopted the UTC as promulgated by the Uniform law Commission). Section 411 provides that a trust may be terminated, and the trust assets distributed to the beneficiaries as they may agree. This could occur regardless of the terms of the trust;5 and such a move could clearly render all the trust assets countable to the applicant/beneficiary for Medicaid eligibility purposes. For those who jump to exclaim, “Wait a minute! The Section 411 termination must meet certain requirements before the trust can be terminated.” To which I respond, “Are you forgetting the courts’ interpretation of the under any circumstances rule? No matter how remote, if the possibility exists that the trust could be terminated and the proceeds made available to the applicant/beneficiary, the trust assets will be countable.”

There may be one “hole,” however, in the state’s argument under the foregoing rule. The rule seems to clearly suggest (though it does not clearly state) that the accessibility of trust assets must be pursuant to the terms of the trust, and the Section 411 accessibility is due to Section 411 and not because of the terms of the trust.

But wait! Couldn’t the state argue instead that it is a right given to the settlor under local law and therefore, a countable asset, not unlike a settlor’s right to recovery under a lawsuit, which we all know is something the states aggressively pursue. Although there is no evidence that states have yet discovered this “loophole” to the trust in jurisdictions that have adopted the UTC, when they do, it won’t be kept a secret.6 


1 Alexander A. Bove, Jr., Trust Protectors: A Practice Manual With Forms, Juris Pub.

2 Cronin v. Director of Medicaid Assistance, Suffolk Superior Ct 99-2853 (2000).

3 Cohen v. Division of Medicaid Assistance, 423 Mass 399 (1996).

4 State Medical Manual, Part 3, Eligibility, Transmittal No. 64, November 1994, sect. 3259 6B Irrevocable Trust.

5 Alexander A. Bove, Jr., A Small Step for an Impatient Beneficiary, A Giant Leap Backwards for the Uniform Law Commission, Trusts and Estates Journal, Sept. 2021

6 For ways to protect against the UTC Section 411 exposure, see the article referenced supra n. 5.

About the Author
Alexander A. Bove, Jr., is the author of several books, including, Trust Protectors: A Practice Manual With Forms, (Juris Pub.NY) and more than a thousand articles in the field of trusts and estates. He practices in Boston with Bove & Langa, PC.
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