In 2009 Massachusetts Superior Court decided the case of Doherty v. Director of Medicaid (Mass. App. Ct., Essex, No. 08-P-939). Although this case was decided a couple of years ago in another state, it bears review here in the PA Elder Law arena. This case deals with a Medicaid applicant who had transferred assets to an Irrevocable Income Only Trust.
The trust document in question forbids distributions of principal to the person who created the Trust. The problem with this particular document is that it contained “standard” language that, when combined with State law, could cause certain directions to be “construed and qualified in light of the instrument as a whole.”
Certain discretionary Trustee powers caused the Trust assets to be available for nursing home spending.
First, the Trustee was given the power to terminate Trust. Many Trusts allow the trustee to close the trust when the value of the assets become so small and it becomes too expensive to run the trust. In this case, if the Trust was terminated, the assets were to be passed out “the beneficiaries.” The Trust creator/Medicaid applicant was deemed to be one of the allowable “beneficiaries.” As a result, the Medicaid applicant was deemed the owned of the assets and did not qualify for Medicaid.
A second discretionary power given to the Trustee, the ability to reclassify income, created issues. The trust creator was an eligible recipient of Trust income and not principal. Hence, the term, Irrevocable Income Only Trust. If the Trust creator qualifies for Medicaid, the income is still payable to the Medicaid recipient’s nursing home even though the Trust principal is protected. In this case, the Trustee was given discretion to decide what was to be defined as income. The Trustee could decide that all of the assets of the trust were “income.” This definition of the Trust assets would therefore permit the Trustee to legally transfer all the assets to the Trust creator who is the income beneficiary. This caused all of the Trust principal to be “owned” by the Medicaid applicant.
So you can see, a seemingly mundane clause can negatively impact planning and result the failure of well intentioned planning. The Court did conclude that properly drafted trusts will be viable Elder Law tools going forward. This article simply reflects the need for care at every turn in the Elder Law planning process. We will continue to use the Medicaid Irrevocable Asset Protection Trust as a centerpiece of the planning process, but will use this case and others like it to continue assisting clients protect their family assets.
Douglas L. Kaune is a partner with the law firm of Unruh, Turner, Burke & Frees, P.C. having three offices in the Western Suburbs of Philadelphia, PA. He practic in the legal areas of Estate Planning, Estate Administration, Elder Law and Asset Protection. Please call his office at 610-933-8069 to schedule an appointent.
