Improper Use Spoils Trust

Improper Use Spoils Trust

Is it possible to spoil a trust by misusing it? The answer was “yes” in S.P. v. Division of Medical Assistance and Health Services (N.J. Super. App. Div. 2025). In that case, a brother wanted to provide housing for his sister. He did this by establishing and funding a trust that would provide her rent-free housing. With that in mind, the trust purchased a home for S.P. (the trust beneficiary) and she moved into it. She lived there rent-free with her adult daughter and grandson.

In 2017, S.P. started depositing her SSI checks directly into the trust. For whatever reason, S.P. believed her deposits would help ensure the trust’s survival. Between August 2017 and October 2022, she deposited a total of $49,852. As of October 31, 2022, the trust had a balance of $21,645.28. S.P. claimed the payments were

When S.P. applied for Medicaid, New Jersey’s medicaid agency denied her application, claiming the trust funds were countable. Although the trust was a third-party trust, because she deposited her funds into the trust, Medicaid took the position that the trust became countable. New Jersey has a no-fault rule, which is a rough amalgam of 42 C.F.R. § 416.1201(a)(1) and 42 U.S.C. § 1396p(h)(1). In short, it claimed the trust funds were available because her action, placing in trust beyond her reach violated the no-fault rule. She lost her case at the caseworker level and on her appeal to the Commissioner. The Commissioner concluded, “S.P.’s Medicaid application was properly denied because the self-funding of the Trust transmuted it into an available resource.”

On appeal from the Commissioner, the Court found no error. “[T]he funds were rendered inaccessible by S.P.’s voluntary choice to deposit them into the Trust. … Accordingly, the $21,645.28 Trust balance was properly considered an available resource.”

Although we disagree with the Court’s reasoning, the conclusion is sound. Rather than finding that the trust was “transmuted,” the Court should have found that the applicant made a transfer, essentially a gift, and imposed a transfer penalty. To the extent a portion of the trust was countable (available), rather than “transmuting” the trust, the decision should have been limited to “the portion of the trust attributable to the assets of the individual.” 42 U.S.C. § 1396p(d)(2)(B). Unfortunately, the language in the decision isn’t limited and implies that the beneficiary’s actions transformed a third-party trust into a self-settled trust.