Any trust created by or funded by the Medicaid applicant or by his or her spouse is a self-settled trust. Since 1993, federal Medicaid law 42 U.S.C. § 1396p(d)(2)(A) creates a two part test for determining which trusts are covered by the rule. Third party trusts, which are created by other individuals and funded with money that does not belong to the benefits applicant, are not covered by this rule.
First, assets of the individual (or the individual’s spouse) must have been used to form all or part of the corpus of the trust. James v. Richman, 465 F. Supp. 2d 395, 403 (M.D. Pa. 2006).[1] Second, the trust must have been formed by one of the following persons: (i) The benefit’s applicant or his or her spouse; (ii) any person, including a court or administrative body, with legal authority to act in place of or on behalf of the individual or the individual’s spouse; or (iii) any person, including any court or administrative body, acting at the direction or upon the request of the individual or the individual’s spouse. Johnson v. Guhl, 91 F. Supp. 2d 754, 763 (D. N.J. 2000). Interestingly, the Statute expressly excludes any testamentary trust created by these persons.[2] See Skindzier; Hazelton v. Wilson-Coker, 2003 Conn. Super. LEXIS 2665 (9/19/2003).
The text of 42 U.S.C. § 1396p(d) leaves several open questions. First, it does not address step-transactions; we do not know whether the language of 42 U.S.C. § 1396p(d) should be literally construed or whether step-transactions will be collapsed, bringing them within the scope of the statute.[3] Second, the statute does not parse the extent of its application when someone other than the applicant creates the trust; for example, what is meant by the phrase “at the direction or upon the request of” the individual.[4] We do know, however, that if assets are commingled, the rules only apply to assets of the benefits applicant.[5] See 42 U.S.C. § 1396p(d)(2)(B). Subsection 1396p(d)(2)(C) does make it clear, however, that the rules apply without regard to- (i) the purposes for which a trust is established, (ii) whether the trustees have or exercise any discretion under the trust, (iii) any restrictions on when or whether distributions may be made from the trust, or (iv) any restrictions on the use of distributions from the trust. Johnson v. Guhl, 91 F. Supp. 2d at 763; Vardion v. Commissioner, 1999 Conn. Super. LEXIS 1759 (6/3/1999).[6]
Trusts and trust like devices[7] subject to the Medicaid rules are treated differently depending on whether the trust is revocable. Also, treatment is sometimes different depending on whether the resource inside the trust is exempt.[8]
A revocable trust is disregarded by Medicaid; resources within it are fully counted when determining eligibility. Johnson v. Guhl, at 763. The corpus is not protected from spend-down or from estate recovery. See 42 U.S.C. § 1396p(d)(3)(A)(i). Payments from the trust to the benefits applicant are treated as income, which means that income cap and cost share rules apply. See 42 U.S.C. § 1396p(d)(3)(A)(ii). Payments to any other person are treated as a transfer of resources and a penalty is assessed. See 42 U.S.C. § 1396p(d)(3)(A)(iii).
Resources within an irrevocable trust may or may not be countable (or unprotected) depending on the type of interest retained by the benefits applicant. If there is any circumstance under which payment from the trust could be made to or for the benefit of the individual (e.g., if hell freezes over then payment could be made – unlikely, but still a possibility), 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.[9] See James v. Richman, supra, at 403; Vincent v. Dep’t of Human Servs., 392 Ill. App. 3d 88, 96 (2009); Gayan v. Ill. Dep’t of Human Servs., 342 Ill. App. 3d 1035 (2003). 42 U.S.C. § 1396p(d)(3)(i).[10] Under this circumstance, any payment of corpus or income to or for the benefit of the individual is treated as income and any payment to someone else is a transfer of resources subject to the penalty rules. To the extent that no payment could be made to the benefits applicant under any circumstances, then a transfer of resources for less than fair market value occurred as of the later of the date the trust was established, or the date on which payment was foreclosed. 42 U.S.C. § 1396p(d)(3)(ii). Certain transfers from one spouse into a sole benefits trust for the other spouse avoid imposition of the transfer penalty rules.[11]
Notes:
1. Similar language appears in the order granting a temporary restraining order. See James v. Richman, 2006 U.S. Dist. LEXIS 28384 (M.D. Pa. 3/20/2006). In Strand v. Rasmussen, 648 N.W.2d 95 (2002), the Court succinctly states the person who furnished the consideration is deemed to have established the trust, even if the trust was actually created, in form, by someone else. See also POMS SI 01120.199.E.2. The POMS indicate that the Medicaid Trust rules apply if any assets of the applicant, “regardless of how little, were transferred to a trust other than by a will.” POMS SI 01120.201.B.7. The portion of the trust funded with the applicant’s assets is the portion subject to the rules. POMS SI 01120.201.C.2.c. This is also consistent with the UTC definition of settlor. UTC, § 103(15).
2. This apparent exception for testamentary trusts was not so apparent in Fisher v. Colo. Dep’t of Health & Fin., 66 P.3d 114 (Col. App. 2002).
3. Although not styled as a step-transaction per se, the following illustration appears in the Restatement: “In consideration of the payment of $10,000 by A to B, B transfers Blackacre to C in trust to pay the rents and profits to A during his lifetime, and to convey Blackacre to D on A’s death. At A’s request, B inserts a provision in the trust deed to the effect that A’s interest should not be transferable by him or subject to the claims of his creditors. A can transfer his interest; his creditors can reach his interest.” Restatement (Second) of Trusts, § 156, Illustration 2. In the Medicaid planning context, the concern would be whether a transaction might be similarly collapsed where assets are transferred to an adult child who then uses those assets to form a trust. Arguably, it should be collapsed if the original owner is a beneficiary and it should not be collapsed if the original owner has no beneficial interest. In Hedlund v. Wisconsin Dep’t of Health Services, 2011 WL 4835721 (Wis. App. 10/13/2011), the court collapsed a transaction of this type after inferring that Mrs. Hedlund transferred assets to her children for the purpose of establishing a trust for herself and her husband.
4. Court decisions and the POMS limit application of this rule to that portion of the trust funded with the applicant’s assets. See Sai Kawn Wong v. Daines, 582 F.Supp. 2d 475 (S.D. N.Y. 2008); POMS SI 01120.201.C.2.
5. POMS SI 01120.201.J.4.
6. POMS SI 01120.201.C.2.d.
7. The rule governing trust-like devices is designed to reach the substance of the transaction and capture disguised trusts. A trust-like device is any legal instrument or device similar to a trust, except that annuities are excluded only to the extent specified by the Secretary. James v. Richman, 465 F. Supp. 2d at 403; POMS SI 01120.201.B.5; POMS 01120.201.G. Transmittal 64 provides that the annuity is not abusive (and not subject to the trust rules) if the expected return on the annuity is commensurate with a reasonable estimate of the life expectancy of the beneficiary. Transmittal 64, § 3258.9B. In Pfeffer v. Ariz. Health Care Cost Containment Sys. Admin., 2011 U.S. Dist. LEXIS 113072 (D. Ariz. 9/30/2011), the Department took the position that funds gifted to an adult child and held by that child to pay through a penalty period, part of a reverse-half-loaf gifting plan, were a trust like device.
8. “If an individual placed an excluded resource in a trust and the trust is countable, the resource exclusion can still be applied to that resource. For example, if an individual transfers ownership of his/her home to a trust and the trust is a countable resource, the home is still subject to the section under SI 01130.100.” POMS SI 01120.201.D.4.
9. It does not matter whether the contingency is probable or improbable. Any circumstance includes events that would only occur “no matter how unlikely or distant in the future.” POMS SI 01120.201.D.2.b. It also includes indirect payments to another person or entity where the applicant derives some benefit. POMS SI 01120.201.F.1. This was described as the peppercorn test in Varidion v. Commissioner, 1999 Conn. Super. LEXIS 1759 (1999). “If there is a peppercorn of discretion, then whatever is the most the beneficiary might under any state of affairs receive in the full exercise of that discretion is the amount that is counted as available for Medicaid eligibility.” In Johnson v. Guhl, 357 F.3d 403, 409 (3rd Cir. 2004), the Court of Appeals held that an irrevocable annuity trust for a community spouse was countable because she might share it with the institutionalized spouse after receipt. Events under the control of other third parties, however, appear to be too speculative to trigger the any circumstances test. For example, in Verdow v. Sutkowy, 209 F.R.D. 309 (N.D. N.Y. 2002), the Department argued that New York law permits the revocation of a trust when there is unanimous consent to do so and, therefore, retention of a power to change beneficiaries arguably makes the trust revocable because the grantor could name different beneficiaries who would revoke the trust. The court rejected this argument as too speculative.
10. It is worth noting that this is consistent with non-Medicaid law. The Georgia Trust Code provides that a settlor’s creditors may reach assets within an irrevocable trust up to the “maximum amount that can be distributed to or for the settlor’s benefit during the settlor’s life or that could have been distributed to or for the settlor’s benefit immediately prior to the settlor’s death.” O.C.G.A. § 53-12-82(2).
11. A sole benefits trust is one where no individual or entity except the spouse can benefit from the assets transferred in any way, whether at the time of the transfer or at any time in the future. Transmittal 64, § 3257(b)(6).
