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NAELA News Journal - NAELA Journal Online

Case Note

Daley v. Executive Office of Health and Human Services and Nadeau v. Director of the Office of Medicaid

By Lisa M. Neeley, Esq.

Does the Massachusetts Supreme Judicial Court decision provide clarity to elder law practitioners or further muddy waters?

For the past several years, Massachusetts Medicaid applicants have been fighting a legal battle over the use of irrevocable income-only trusts (IIOTs), which are commonly used in Medicaid and long-term care planning. This tug-of-war with the state’s Medicaid agency, MassHealth, culminated in the Massachusetts Supreme Judicial Court agreeing to hear oral arguments in two cases involving the eligibility of applicants for MassHealth long-term care benefits who used such trusts. In both cases, the applicants had transferred title of their residences to an IIOT and reserved the continuing ability to reside in their properties, which the state argued rendered the corpus of their IIOTs as countable resources in full for determining their benefits eligibility. NAELA and the Massachusetts Chapter of NAELA submitted briefs in support of the applicants.

On May 31, 2017, the Supreme Judicial Court issued its decision in Daley v. Executive Office of Health and Human Services and Nadeau v. Director of the Office of Medicaid.1 It reversed the Medicaid denials, holding that the ability of the grantors to continue to reside in homes that had been transferred into their IIOTs did not make the corpus of such trusts available and countable resources.2

Although providing clarity on this particular issue, the decision created ambiguity in several other trust provisions. In Nadeau, the Supreme Judicial Court ordered a remand for consideration of whether the grantor’s ability to appoint assets to a charity or nonprofit organization would cause the assets to be included under the federal Medicaid statute’s “any circumstances” test.3 In both cases, remands were ordered to consider whether a provision permitting the trustee to use the corpus to pay the grantor’s income tax obligation triggered by income distributions from the trust could also cause any portion of the trusts to be deemed countable.4

I. The Any Circumstances Test
The treatment of an IIOT in the Medicaid planning context is governed by the federal statute’s any circumstances test. This law, which has remained unchanged since 1993, states the following:

In the case of an irrevocable trust, if there are any circumstances under which payment from the trust could be made to or for the benefit of the individual, the portion of the corpus from which, or the income on the corpus from which, payment to the individual could be made shall be considered resources available to the individual … .5

For Massachusetts’ purposes, the corresponding MassHealth regulation similarly provides that the principal of an irrevocable trust is a “countable asset” in cases in which it “could be paid under any circumstances to or for the benefit of the individual.”6 Cases from the Massachusetts appellate courts have always interpreted the statute to mean that an available and thus countable resource means that the corpus of the trust at issue is actually payable to an applicant for benefits.7

II. MassHealth’s Availability Argument
The theory that MassHealth has advanced over the years is that the ability to use real property as living quarters makes it an available resource. If available as a practical matter, meaning that the applicant can reside in the property, the property is considered available for determining Medicaid eligibility and its value for eligibility purposes is the property’s full fair market value. This argument originated with a MassHealth regulation respecting the exemption for homes held in trusts. The regulation states, “The home or former home of a nursing facility resident or spouse held in an irrevocable trust that is available according to the terms of the trust is a countable asset.”8

Until 2014, MassHealth regulation defined the term “available” as a resource countable under the Supplemental Security Income (SSI) program; however, this provision was deleted that year, leaving an opening for the agency’s more expansive definition of the term.9 MassHealth pointed to guidance from the Centers for Medicare & Medicaid Services in Transmittal 64 that, for Medicaid purposes, “payment from a trust” could include “noncash or property disbursements, such as the right to use and occupy real property.”10 Thus, MassHealth reasoned, the right to use the home property — whether arising from the trust, as in Nadeau, or from the life estate interest in a deed, as in Daley — was considered a payment of an available resource, entitling the agency to count the entire fair market value as an available resource, notwithstanding trust language prohibiting distributions of principal. The issue was litigated in dozens of Massachusetts cases before reaching the state’s Supreme Judicial Court.11

III. Background of Nadeau and Daley Cases

A. Nadeau v. Director of the Office of Medicaid
On March 27, 2001, Lionel Nadeau and his wife, Jacqueline, transferred title of their primary residence in Webster, Massachusetts, into an irrevocable trust, from which they could receive distributions of income. The principal was to be held in trust until the termination of the trust, which was to occur upon the death of the surviving spouse or when the trustee, in her sole discretion, determined that the trust should be terminated. Upon termination, the principal of the trust was to be distributed to the Nadeaus’ children. The Nadeaus retained the ability to use and occupy their residence.

The Nadeaus also retained the ability under the trust to appoint “all or any part of the trust property then on hand to any one or more charitable or non-profit organizations over which [they] have no controlling interest.”12 The trust also provided that the trustee could distribute principal to the Nadeaus “to the extent that the income of the trust generates a tax liability” to enable the Nadeaus to pay any tax liability generated by the income distributions.13

In 2014, Mr. Nadeau was admitted to a long-term care facility and applied for MassHealth benefits. When the application was submitted, the assessed value of the residence was $173,700.14 Mr. Nadeau had only $168.15 in cash assets outside the trust.15 His application was denied because of excess resources as a result of the value of the residence held in trust.

In upholding the denial of the MassHealth application, a hearing officer from the Office of Medicaid Board of Hearings reasoned that the use and occupancy clause rendered the assets of the trust available to Mr. Nadeau, and thus that the corpus was fully countable to him, despite his having no ability to receive distributions of trust principal.16 The hearing officer declined to apply the any circumstances test and instead determined that because “the appellant’s former home is available to appellant by virtue of the fact that he can use and occupy the home and he is an income beneficiary of the Trust which is funded with the home,” the MassHealth regulations direct that such principal is countable for Medicaid eligibility purposes.17

B. Daley v. Executive Office of Health and Human Services
On December 19, 2007, Mary and James Daley deeded their primary residence to an IIOT but retained a life estate in the property.18 The Daleys had the ability to receive income distributions from the trust, but the trustees had “no authority or discretion to distribute principal of the Trust” to either of them.19 As in Nadeau, the trustee was permitted to pay principal as needed to satisfy any income tax obligation arising from the payment of income from the trust to the Daleys.

Six years after the property was deeded into the IIOT, Mr. Daley was admitted to a long-term care facility and applied for Medicaid. His application was denied because of excess resources resulting from the inclusion of the value of the home that was transferred into the IIOT. On appeal, the hearing officer agreed with MassHealth that the retention of the life estate rendered the trust assets available and thus countable resources in determining the applicant’s eligibility for long-term care benefits.20 Countability could be determined by the ability to continue to reside in the primary residence, via the retention of a life estate, in which the remainder interest had been transferred into a trust.

IV. Review by Massachusetts Supreme Judicial Court
Following the affirmation of the administrative decisions by the Worcester Superior Court, both Daley and Nadeau were appealed. The plaintiff in Daley filed a petition for direct appellate review of the case by the Supreme Judicial Court, which was accepted. The Court then, on its own initiative, transferred the Nadeau case to its docket for direct appellate review.

A. Holding of the Cases
In its decision, the Supreme Judicial Court reversed the denials in both Daley and Nadeau, holding that “neither the grant in an irrevocable trust of a right of use and occupancy in a primary residence to an applicant nor the retention by an applicant of a life estate in his or her primary residence makes the equity in the home owned by the trust a countable asset for the purpose of determining Medicaid eligibility for long-term care benefits.”21

Regarding Nadeau, the Supreme Judicial Court held that MassHealth erred in failing to recognize the distinction, which is sharply drawn in the federal statute and regulations, between principal and income. The federal statute establishing the any circumstances test recognizes that a payment may be from the corpus or it may be from income — and that a payment from income does not render the underlying corpus available. The right to use a home does not entitle the trustee to sell the home and turn the proceeds over to the beneficiary, assuming that the proceeds are available. Thus, “noncash … payments” (as mentioned previously) — similar to the right to use property — are considered an income interest, not principal, and the value of the underlying principal is not the proper measure of what is available. The Supreme Judicial Court chided MassHealth, quoting the U.S. Supreme Court in Heckler v. Turner,22 for “conjuring fictional sources of resources by … overvaluing assets in a manner that attributes nonexistent resources to recipients.”23

The Massachusetts Supreme Judicial Court noted in Daley that its analysis was different from that in Nadeau because the Daley trust did not own the home in fee simple.24 Rather, the Daleys retained a life estate, deeding only the remainder interest in their home to the trust. The life estate was an asset of the Daleys that could be “sold, mortgaged or leased” and if sold, the life estate portion would be returned to the Daleys if one or both were still alive.25 But, the Court noted, MassHealth effectively conceded in Heyn that a life estate in an applicant’s primary residence is not a countable asset and this use of the home does not make the remainder in trust countable to the applicant.26

B. Questions Left Unanswered
Regarding the tax reimbursement clause in both trusts, the lower courts determined that MassHealth never demonstrated what, if any, portion of the trusts could be paid as a result of this provision and declined to find for MassHealth on this basis.27 The Supreme Judicial Court agreed with the lower courts’ findings and remanded the cases to the agency to determine what portion of the trusts, if any, could be used to pay a tax obligation generated to the grantor as a result of any trust income that had been distributed.28

The Supreme Judicial Court also ordered a remand of Nadeau to MassHealth for the agency to consider whether Mr. Nadeau’s ability to appoint assets to a nonprofit organization or charity could be interpreted to mean that the corpus could be appointed for his care costs.29 The Court noted that up to one-fourth of nursing homes in the state were nonprofit organizations and therefore it was at least conceivable that the power of appointment for the payment of care costs could be exercised in favor of a grantor in a nonprofit nursing home.30 A favorable Board of Hearings decision on this issue was released in August 2017.31

The Supreme Judicial Court left unanswered the question about how the use and occupancy right could be precisely valued as an income stream in an applicant’s patient-paid amount calculation.32 The Court noted, “HCFA [Health Care Financing Administration] Transmittal 64 accurately recognizes that, where a trust grants the use or occupancy of a home to the grantors, it is effectively making a payment to the grantors in the amount of the fair rental value of the property.”33 Thus, the use and occupancy right is an income interest that entitles the holder to the receipt of rental income, which can be calculated as part of the patient-paid amount.

However, if the grantor decides to reside in the home and essentially forfeit the ability to receive rental payments, “the fair market value of the rent that otherwise would have been earned and treated as actual trust income is deemed paid to the grantor under Transmittal 64.”34 The deemed income payment is not a “payment from the corpus of the trust” but rather is a payment from the “income on the corpus.”35 The income payments, whether imputed or actually received, should presumably be included as part of the grantor’s monthly patient-paid amount contribution. It remains to be seen how MassHealth will factor the imputed, but not actually received, income into a patient-paid amount calculation.

V. Caution Moving Forward
Following Daley and Nadeau, elder law practitioners should revisit whether to include the following problematic provisions when drafting IIOTs: 1) the ability to appoint assets to a nonprofit or charitable organization (arising from the issue remanded in Nadeau); 2) a use and occupancy clause (arising from the issue raised by the Supreme Judicial Court in Nadeau concerning the ability of the state Medicaid agency to impute income and include it as part of the patient-paid amount calculation); and 3) the ability of the trust corpus to pay the grantor’s income taxes. If Massachusetts ever decides to enact expanded estate recovery, a retained life estate might cause the entire corpus of an irrevocable trust to be subject to a MassHealth estate recovery lien, as noted by the Daley Court.36

1 477 Mass. 188 (2017).

2 Id. at 189.

3 Id. at 203.

4 Id. at 203–204.

5 42 U.S.C. § 1396p(d)(3)(B)(i) (2017).

6 130 Code Mass. Regs. 520.023(C)(1) (2013).

7 See Heyn v. Dir. of Off. of Medicaid, 89 Mass. App. 312, 315 (2016).

8 130 Code Mass. Regs. 520.007(G)(2), (8), 520.023(C)(1)(d) (emphasis added).

9 Id. at 515.001.

10 Dept. of Health & Human Servs., State Medicaid Manual, HCFA [Health Care Financing Administration] Publication 45-3, Transmittal 64 § 3259.1.A.8 (Nov. 1994).

11 See William J. Brisk & Rebecca Flewelling, Trusts Used in Medicaid Planning: The Doherty Challenge to Irrevocable Income Only Trusts and Its Aftermath, 96 Mass. L. Rev. 95, 97 (2015).

12 Daley, 477 Mass. at 197.

13 Id.

14 Id.

15 Id.

16 Off. of Medicaid, Bd. of Hrgs., App. 1408634, 8 (Nov. 28, 2014).

17 Id.

18 Daley, 477 Mass. at 198. The residence had a fair market value of approximately $150,000.

19 Id. at 199.

20 Id. at 198.

21 Id. at 189.

22 470 U.S. 184, 200 (1985).

23 Daley, 477 Mass. at 202.

24 Id. at 203.

25 Id. at 203–204.

26 Id. at 204 n. 14.

27 Id. at 204.

28 Id.

29 Id. at 203.

30 Id. It is important to note that Mr. Nadeau is in a for-profit nursing home.

31 Off. of Medicaid, Bd. of Hrgs., App. 1614874 (Aug. 18, 2017).

32 Daley, 477 Mass. at 202.

33 Id.

34 Id.

35 Id.

36 Id. at 204 n. 15.

About the Author

Lisa M. Neeley, Esq., is of counsel with the law firm of Mirick, O’Connell, DeMallie & Lougee, LLP, in Worcester, Massachusetts, where she is a member of the Trusts and Estates practice group. Lisa earned her BA degree, cum laude, from Assumption College and her law degree, cum laude, from New England School of Law. Over the past several years, Lisa has been involved in a number of irrevocable trust and other litiga­tion matters involving Medicaid, most notably the recent cases of Heyn v. Director of the Office of Medicaid and Daley v. Executive Office of Health and Human Services. Lisa concentrates her practice in assisting clients obtain Medicaid eligibility for both long-term and community-based care, including the planning and preparation of complex Medicaid ap­plications, state Medicaid litigation, special needs and disability planning, and general estate planning. She is a member of the Massachusetts Chapter of NAELA and serves on its Board of Directors.