State’s contigent interest in pooled trust sub-account ends when master trust retains funds, not when it uses them

In the Matter of the Medical Assistance Pooled Special Needs Trust of Scott Hewitt (Iowa 2023), the State Medicaid agency had a contigent interest in the trust remainder due to the payback requirement in 42 U.S.C. § 1396p(d)(4)(C). However, after the beneficiary died, the master trust informed the Department that it would retain the remainder, which is not prohibited under federal or Iowa law. The Department took the position it was entitled to continuing accountings from the master trust to ensure the funds were used appropriately. The trust disagreed and the case went to trial where the trial court sided with the Department on summary judgment.

On appeal the Iowa Supreme Court reversed, finding that the trustee’s duty to provide accountings ends when the trust terminates, and a trust terminates when there is nothing left in the trust. When the remainder was retained by the master trust, that terminated the Department’s contingent interest in the trust and terminated its right to acountings.

Because a trustee’s accounting duty only requires it to keep beneficiaries “reasonably informed about the administration of the trust and the material facts necessary to protect the beneficiaries’ interests,” Iowa Code § 633A.4213, and because, after the trust retains the funds as part of the wind up process, there is no longer a contingent interest in favor of DHS (or even a trust subaccount to administer), DHS is only entitled to an accounting showing that the trust retained the funds for a proper purpose.

The accounting provided by the master trust informed the Department of the trust’s activity during the beneficiary’s lifetime, the remaining balance at the time of death, that the master trust would retain the remainder and that it would use the funds for a proper purpose. No more was required.