Don Freedman presented on "Trusts in Elder and Disability Law" on November 2, 2009
[November 2, 2009]
Donald N. Freedman

Donald Freedman of the firm spoke on the "Use of Trusts in Elder and Disability Law" on November 2, 2009. The program was by the Estate Planning Council of Berkshire County and the Alzheimer's Association, Massachusetts/New Hampshire Chapter. The program was hosted by and held at Epoch Assisted Living At Melbourne, in Pittsfield.

Attorney Freedman's background paper, prepared for the program, follows:

Introduction

Trusts have long been considered useful tools in planning for elders and persons with disabilities, for many reasons, especially in contrast with guardianship of the estate (or conservatorship, under the terminology of the Uniform Probate Code recently enacted in Massachusetts). Whereas a guardian’s authority has been circumscribed by generally inflexible rules of general application, a trustee’s powers may be tailored to meet the beneficiary’s specific needs, limitations and strengths. To protect an individual by conservatorship, the individual must be found to be mentally incapacitated at least to some degree. As a result, conservatorship is unavailable where the concern is about physical incapacity or the future mental incapacity of an individual in the early stages of progressive conditions like multiple sclerosis, Parkinson’s disease or Alzheimer’s disease. With conservatorship, recovery of capacity is grounds for termination. This results in uncertain and incomplete protection for individuals who, for example, may experience cycles of active mental illness paired with periods of apparent remission. A trust, in contrast, can provide life-long protection whatever the individual’s capacity at any particular time. A conservatorship appointment has historically been contingent on a black and white finding of incompetence, and would most often deprive the ward of participation in financial decision-making completely, and in all respects. In contrast, a trustee is limited in scope to control of trust assets, leaving the beneficiary legally unencumbered to function to establish credit, manage a bank account, and otherwise function within his capacity in the wider world. Trustee powers can be circumscribed to reflect the circumstances of the many people with limitations far short of total, and thus to allow the beneficiary the fullest appropriate role in decision-making. While the institution of guardianship reflects parens patriae ideas often at odds with principles of personal empowerment favored today by many individuals, families and advocates, a trust can be drawn to reflect individual values and preferences whatever they might be, and thereby to provide the trustee with a sense of direction essential to ensuring the quality of decision- making in the personal no less than the financial domain. The enactment of the Uniform Probate Code has vastly increased the potential for the tailoring of conservatorship authority to those powers deeded essential to protect the individual’s core interests.

While the petitioner only nominates the conservator, the grantor appoints the trustee. There is in any case the expense, uncertainty and loss of control inherent in involvement of the court and appointed counsel, as well as the inherently adversarial nature of the conservatorship appointment process that renders it a distasteful and rough alternative for dealing with the sensitive and emotional personal and family issues underlying the concerns to be addressed.

A critical reason for using a trust rather than relying on conservatorship relates to government benefits. Many people with disabilities, as well as elders, require substantial medical services but have limited means to pay for it privately, and often little opportunity for employment in jobs that provide medical insurance as a benefit. Thus, Medicaid is a necessity, often the individual’s sole resource, for medical care, durable medical equipment, supplies and medicines, as well as for long-term care. While Medicaid is necessary, it is not sufficient. Medicaid provides little for non-institutional residential arrangements, long-term care or for any of the necessities of life aside from health and rehabilitative services. Even within the medical sphere, gaps and delays make care often unavailable as and when needed.

Families, planners and advocates have striven over the years to make the most of the advantages of trusts for long-term planning, while also using them to compensate for the inadequacies of Medicaid and other government benefit programs. This tension between trust utilization and Medicaid eligibility has often led government to restrict trust utilization in the Medicaid context. It is also in the aura of this tension that planners will continue to work, in the interest of their clients.

In 1993, Congress went through another in a series of periodic revampings of Medicaid transfer and trust provisions under Medicaid. In 1999, Congress extended analogous and in many respects identical provisions on transfers and trusts to the Supplemental Security Income (SSI) program, just now finding its way into POMS and other administrative guidance. While further restricting trust utilization in some contexts, the new laws have left available some options, and have created new ones, that continue to offer opportunities for the creative use of trusts in planning contexts relating to elders and persons with disabilities. The purpose of this paper is to outline the major pitfalls and potentialities of the use trusts for the benefit of MassHealth applicants and members (as recipients are called in Massachusetts). While some mention is made of other benefit programs, such as rent subsidy programs like Section 8, our focus is on MassHealth as the most important benefit.

The MassHealth Regulations affect virtually any trust for the benefit of a MassHealth applicant or member, in one way or another. Most broadly, trusts are either OBRA or non-OBRA, for regulatory purposes. OBRA trusts are those established after August 10, 1993 by an individual (as defined) with the individual’s assets, with the lone exception of trusts established by will. OBRA trusts are governed by the provisions of 130 CMR 520.023 and also to the “General Trust Rules” set out at 130 CMR 520.024. Non-OBRA trusts are subject only to the “General Trust Rules” at 130 CMR 520.024. Also, trusts meeting the OBRA criteria but established prior to August 11, 1993 are subject to the holding in the Cohen case, discussed in more detail below.

This paper attempts to provide an overview, in outline form, of an extremely complex area of legal practice, involving the interleaving of estate planning, tax law and entitlements law with the most sensitive aspects of personal autonomy. We will describe eleven types or paradigms of trusts pertinent to this context, in each case defining its distinguishing characteristics and noting its uses and remaifications for benefits, focusing on Medicaid (MassHealth).

1. Funded Revocable Trust
a. Definition: any trust whose terms allow the person funding the trust to regain them.
b. MassHealth Ramifications
i. Trust principal is countable. Recognize that this does not always matter. It DOES matter for MassHealth recipients who are subject to a $2,000 limitation in countable assets. These include MassHealth applicants or members 65 years of age or older and for recipients of nursing home services of any age. It also applies to many near-elders, people with intellectual disabilities (“mental retardation” in the old terminology) and others receiving MassHealth services under a federal waiver providing benefits to persons who would require nursing home services but for the availability of certain MassHealth services at home or in the community. Aside from these groups, however, MassHealth eligibility is not subject to an asset limit at all. On the other hand, income is countable, and so at some order of magnitude having assets in a countable revocable trust may interfere with eligibility.
ii. The principal residence in a revocable trust (or any other type of trust) loses its otherwise exempt status and is countable.
iii. Trust income is countable, whether accumulated or paid to or applied for the benefit of the MassHealth applicant or member.
iv. A transfer to a revocable trust does not result in a period of ineligibility.
v. A distribution from a revocable trust to or for the benefit of a person other than the grantor within 60 months of application results in a period of ineligibility.
c. Uses
i. Provides a vehicle for the spend-down of assets retained by an individual who has also transferred assets for eventual MassHealth eligibility under a transfer plan.
ii. Facilitates shared or delegated asset management for an individual who while competent currently lacks the sophistication or interest needed for sole control.
iii. Provides a mechanism for continuity of management despite future incapacity.
iv. Serves as a mechanism for the orderly transmission of property at death without the expense, delay and publicity of probate.
v. Serves as a vehicle for the on-going management of assets for the benefit of a Section 8 recipient who may receive only non-recurrent support without having support characterized as income, impacting rent.
d. Special Planning Note – The Canter problem. The case of Canter v. Commissioner of Public Welfare, 423 Mass. 425, 668 N.E.2d 783 (1996) dealt with the following facts. When the applicant became institutionalized, her husband amended his revocable trust to delete the applicant as a beneficiary of the trust and named alternative trust remaindermen. Within days, he died. The Division characterized the amendment of the trust as a transfer that, under the transfer regulations then in effect, resulted in her being ineligible for MassHealth for a 30-month period. The Supreme Judicial Court rejected the Department's argument that the transfer of the applicant's contingent beneficiary interest in her husband's trust constituted a gratuitous transfer, the full value of which was an accountable asset in calculating Medicaid ineligibility. Nor did the court fully accept the applicant’s argument, that the husband had retained full title despite transfer to the trust, and that his wife, as a contingent remaindermen, could not be viewed as having made a disqualifiying transfer because she never had a vested interest in the trust corpus at all. The court observed that the asset's value was the value of the trust corpus discounted to reflect the likelihood of the applicant's contingent interest vesting. As such a value was indeterminate, there was no transfer of her interest. Despite its ruling, the court indicated concern that the use of such devices might undermine public policy. Unprepared to rule definitively on whether at a settlor's death dispositive provisions of a revocable trust constituted a transfer, the court remanded the matter to the Department for further consideration and disposition. Neither the Department nor the claimant pursued the matter further in the superior court; neither did the Department undertake to deal with the issue by regulation. Instead, we are left with the court’s misgivings. The case stands at least as a warning flag about pre-mortem planning strategies having the effect of diverting resources from a MassHealth applicant or recipient, at least “other than by Will.”

2. Retained Interest Trust.
a. Definition.
i. An irrevocable trust funded by the individual other than by Will;
ii. For the benefit of the individual himself or his spouse;
iii. Under the terms of which there are any circumstances under which the trustee may distribute income and principal to the beneficiary.

b. MassHealth Ramifications
i. A transfer of assets to a Retained Interest Trust is not disqualifying. That’s the only good news.
ii. The principal of a Retained Interest Trust in which the Trustee may distribute principal to the MassHealth applicant or member is fully countable, whether or not distributed.
iii. The income of a Retained Interest Trust in which the Trustee may distribute income to the MassHealth applicant or member is fully countable as income. Undistributed income is treated as an addition to principal, and countable.
iv. A distribution of income or principal to a third party will result in a period of ineligibility if made within 60 months of application.
v. N.B. The term “individual” is defined very broadly under OBRA ‘93. An individual shall be considered to have established a trust if assets of the individual were used to form all or part of the corpus of the trust and if any of the following persons, in addition to the individual himself and his spouse, established the trust other than by will: a person, including any court or administrative body, acting at the direction or upon the request of the individual or individual’s spouse. 42 U.S.C. §1396p(d)(2)(A).
c. Uses: None! Alone among the trusts under consideration, the Retained Interest Trust has no potential use in the MassHealth context. Since trust principal is considered accessible to the MassHealth applicant or member, the individual is rendered ineligible for benefits until principal and income are exhausted. It is listed here because it is a type of trust defined under OBRA, and to highlight the need to avoid unintended characterization of your trust as a Retained Interest Trust, e.g., an income-only trust with insufficiently clear restrictions on principal.
d. Special Planning Note – The Cohen problem. In Cohen v. Division of Medical Assistance, 423 Mass. 399, 668 N.E.2d 769 (1996) and three companion cases, the Supreme Judicial Court for the first of what would many times dealt with the circumstances of grantors transferring assets to trusts of which they or their spouses were beneficiaries. The beneficiaries then claimed eligibility for Medicaid assistance because the trusts, while according trustees substantial discretion generally, explicitly sought to deny or limit the trustees’ discretion to distribute funds to the beneficiaries under any of several formulations:
The Trustees, however, shall have no authority whatsoever to make any payments to or for the benefit of any Beneficiary hereunder when the making of such payments shall result in the Beneficiary losing her eligibility for any public assistance or entitlement program of any kind whatever. (Cohen)
Until the later to occur of (1) the passage of thirty months from the date of the establishment of this trust and (2) the date upon which either beneficiary is first institutionalized, and also thereafter during any periods of time during which the first beneficiary to be institutionalized is not then institutionalized, the Trustee shall apply on behalf of such first beneficiary so much of the principal of the Trust as is necessary and appropriate to provide him/her with those benefits and services, and only those available to him/her from other sources as or when needed for his/her welfare. (Comins)
“The Trustee is prohibited from spending sums of interest or principal to [Walker] for her benefit for services which are otherwise available under any public entitlement program of the United States of America, the Commonwealth of Massachusetts, or any political subdivision thereof. (Walker)
“The purpose of this Trust is to provide for the supplemental care, comfort, health, maintenance, support, education, habilitation and welfare of the Primary Beneficiary . . . taking into account the benefits of . . . assistance the Primary Beneficiary otherwise receives as a result of his or her disability . . . from any state or federal government or governmental agency . . . (Kakoska)

The Court was asked to interpret the following provision of federal law, as applied to trusts funded by the individual for his own benefit or that of his spouse: “The amount deemed available to the grantor . . . is the maximum amount of payments that may be permitted under the terms of the trust to be distributed to the grantor, assuming the full exercise of discretion by the trustee for the distribution of the maximum amount to the grantor.”
The court affirmed the finding of the lower court and held that under applicable statutes, if there was even a “peppercorn of discretion” regarding availability of funds, then whatever the beneficiaries could most receive in the full exercise of that discretion was the amount that was counted as available for Medicaid eligibility.
Despite the strictures of the decision and the plain intent of the court to take away the possibility of grantor-beneficiaries of having their cake and eating it to, trust draftspersons since Cohen have continued to try to find a defensible linguistic place within a trust affording both asset protection and potential benefit to the grantor-beneficiary. The difficulties involved in this exercise have been most recently been illustrated in the case of Doherty v. Director of the Office of Medicaid, 74 Mass. App. Ct. 439, 908 N.E.2d 390 (2009).
In Doherty, the applicant a nursing home resident, was the beneficiary of what in the paradigm of this paper would be a self-funded income-only trust. Conceding the countability of income, the applicant argued that principal was non-countable. In support of that position, the trustee pointed out that, by the trust’s terms, the trustee may “make no distribution of principal from the Trust, to or on behalf of” the beneficiary. For the beneficiary’s sake, would that the trust had ended with that. However, the court was easily and appropriately convinced not to read this clause in isolation (where it should have been left), but rather to construe and qualify it in light of the instrument as a whole. And looking at the trust as a whole, the court saw enough flexibility and ambiguity -- in the determination of beneficiaries, for one thing – to be unconvinced that the trustees were unable, in any reasonably foreseeable circumstance, to invade trust assets for the applicant's benefit. Amid faint praise, it held that the trust “constituted a remarkably fluid legal vehicle, intelligently structured to provide both Muriel and the trustees maximum flexibility to respond to Muriel’s changing life needs.” Well-drawn, but not for MassHealth. Helpfully, however, the court went out of its way (although this must have pained the draftsperson) to “take this opportunity to stress that we have no doubt that self-settled , irrevocable trusts may, if so structured [as an income-only trust], so insulate trust assets that those assets will be deemed unavailable to the settlor,” citing Guerriero v. Commissioner of the Div. of Med. Assistance, 433 Mass. 628, 633, 745 N.E.2d 324 (2001). The lesson is, keep it simple.

3. Non-Retained Interest Trust
a. Definition.
i. An irrevocable trust funded by the individual other than by Will;
ii. Exclusively for the benefit of persons other than the individual or spouse;
iii. Under which there are no circumstances under which the trustee may distribute income or principal to the individual or spouse.
b. MassHealth Ramifications
i. A transfer of assets to a Non-Retained Interest Trust results in a period of ineligibility if within 60 months of application.
ii. Neither the principal nor the income of a Non-Retained Interest Trust is countable.
iii. Any distribution by the trustee from a Non-Retained Interest Trust to a third party should not result in a further period of ineligibility.
c. Uses
i. Serves as a protective mechanism to benefit family members with special needs short of disability; e.g., a family member with health problems expected to result in eventual impairment of work capacity although not presently disabling; with impaired judgment; with financial or marital problems; and so forth.
iii. An available alternative to an Income-Only Trust, with different income, gift and estate tax implications, where the value of the assets to be transferred is more than about $490,000 (60 months x average nursing home daily rate), but where the age, health status, and extent of retained assets is such that a 60-month look-back for eligibility does not involve unreasonable risk.

4. Income-Only Trust
a. Definition.
i. An irrevocable trust funded by the individual other than by Will;
ii. For the benefit of the individual or spouse;
iii. Under which the trustee is obligated or has the discretion to distribute income to the individual, but not principal under any circumstances. Such trusts, treating the income and principal portions separately, are in effect hybrid forms of the Retained Interest Trust (with respect to income) and the Non-Retained Interest Trusts (with respect to principal).
b. MassHealth Ramifications
i. The income portion of the trust is subject to regulations governing Retained Interest Trusts. That is, if the Trust either provides for mandatory income or gives the trustee the discretion to distribute income to the individual or spouse under any circumstances, net trust income is countable, whether or not actually distributed. However – and this is a very important exception – in-kind distributions (that is, distributions made to a third party to provide goods or services to the beneficiary) are not treated as income to the beneficiary for MassHealth services, and thus have no impact on eligibility.
ii. The principal portion of the trust is subject to regulations governing Non-Retained Interest Trusts. That is, transfers to an Income-Only Trust result in a period of ineligibility if within 60 months of application. Principal is not a countable resource. Distributions of principal to persons other than the individual or spouse should not result in a further period of ineligibility.
c. Uses
i. Provides access to income while protecting principal, mitigating the effect on the grantor of an outright gift, as well as some of the risks to the assets being in the hands of the transferees, e.g., death, disability, divorce of the transferee.
ii. Structuring the trust to ensure grantor trust status for income tax purposes results in the grantor being the taxpayer for income tax purposes. Given the beneficiary’s typically low base income in relation to other family members and the likely availability of medical deductions, this will usually result in a lower tax liability on trust interest and dividends as well as on the capital gains resulting from the sale of appreciated trust assets.
iii. Structuring the trust to ensure retained life estate status for estate tax purposes results in stepped-up rather than carry-over basis for appreciated assets remaining in the trust on the death of the grantor, resulting in lower income tax liability for the remainder beneficiaries upon later sale of trust assets.

5. Qualified Self-Funded Special Needs Trust
a. Definition
i. An irrevocable trust created for the sole benefit of an individual under age 65 with a disability meeting criteria for Social Security Disability or Supplemental Security Income benefits;
ii. Created by the individual’s parent, grandparent, guardian or a court;
iii. Funded with assets of the individual;
iv. Providing for payments to the Commonwealth (and other states) from funds remaining in trust at the individual’s death for Medicaid services provided; and
v. Otherwise meeting the criteria of 42 U.S.C. § 1396p(d)(4)(A) and 130 CMR 515.001 and 520.023(D).
b. MassHealth Ramifications
i. A transfer to the Trust while the MassHealth applicant or recipient is under age 65 does not result in a period of ineligibility.
ii. The Trustee having the discretion to distribute Trust principal or income to the MassHealth applicant or recipient does not result in Trust principal or income being countable.
iii. Distributions by the Trustee of principal or income directly to the MassHealth applicant or recipient are countable as income.
iv. Distributions by the Trustee of principal or income to others for the purchase of goods or services to benefit the MassHealth applicant or recipient are not countable, since the regulatory definition of income for MassHealth excludes the value of in-kind support.
v. If the intention is to fund the trust with the proceeds of a personal injury action, the state must be repaid for any MassHealth services provided before a special needs trust can be funded. 130 CMR 520.019(F).
c. Use. The most common use of the Qualified Self-Funded Special Needs Trust is to provide a mechanism for the management of assets received by the MassHealth applicant or recipient from inheritance or lawsuit recovery. However, persons under age 65 and not in a nursing home have no asset limit on eligibility in any event, and would face no period of ineligibility from transfer of the assets in any event. Nonetheless, use of the Trust may be warranted on any one or more of the following grounds:
i. The individual seeks to retain eligibility for Supplemental Security Income (SSI) or other programs to which an asset limit applies.
ii. While assets are ordinarily not countable for persons under age 65 (unless in a nursing home or receiving services under a waiver, as discussed above), assets are countable for persons age 65 and over. If there is any expectation of the individual needing to continue to qualify for MassHealth upon reaching age 65, consider establishing and funding the trust now even though in advance of need.
iii. Similarly, while assets are not countable for most persons in community settings (not receiving services under a waiver) for MassHealth purposes, they are for persons in nursing homes. To the extent that the nature of the individual’s disabilities raise a special risk of the need for such a placement at some time, consider establishing and funding it now.
iv. While assets may not be countable for MassHealth purposes under certain circumstances, income always is. Transferring assets to a qualified special needs trust can render the income generated by the investment of the assets non-countable, as well as the assets themselves. This may be a particularly compelling reason to establish the trust where investment income may drive the individual over the income limit for MassHealth Standard ($1,167 in 2009); where the individual is not working at least 40 hours per month and thus would not qualify for MassHealth-CommonHealth as a disabled worker; and where the individual’s medical needs are not so extensive that he can achieve MassHealth-CommonHealth eligibility by meeting a one-time deductible. See 130 CMR 505.004(B) and (C), and 130 CMR 505.009.
v. Establishment of the trust may be readily possible now given the availability of a living, willing and able parent or grandparent. The individual himself cannot establish a qualified special needs trust. If a parent or grandparent is available and willing now to establish the trust, one may wish to consider establishing it now. While establishment by a court is possible, procedures are uncertain and costly.

6. Qualified Third-Party Special Needs Trust
a. Definition
i. An irrevocable trust created for the sole benefit of an individual under age 65 with a disability meeting criteria for Social Security Disability or Supplemental Security Income benefits (whether or not actually receiving benefits under either program);
ii. Created by the individual’s parent, grandparent, guardian or a court;
iii. Funded with assets other than those of the individual;
iv. Providing for payments to the Commonwealth (and other states) from funds remaining in trust at the individual’s death for Medicaid services provided; and
v. Otherwise meeting the criteria of 42 U.S.C. § 1396p(d)(4)(A) and 130 CMR 515.001 and 520.023(D).
b. MassHealth Ramifications
i. A transfer to the Trust does not result in a period of ineligibility.
ii. The Trustee having the discretion to distribute Trust principal or income to the MassHealth applicant or recipient does not result in Trust principal or income being countable.
iii. Distributions by the Trustee of principal or income directly to the MassHealth applicant or recipient are countable as income.
iv. Distributions by the Trustee of principal or income to others for the purchase of goods or services to benefit the MassHealth applicant or recipient are not countable, since the regulatory definition of income for MassHealth purposes no longer includes the value of in-kind support.
v. The state must be repaid before a qualified trust can be funded with the proceeds of a personal injury suit. 130 CMR 520.019(F).
c. Use. The most common use of the Qualified Third-Party Special Needs Trust is to preserve the assets of an elder facing nursing home placement for the benefit of a son or daughter with disabilities. An aging parent will naturally need to retain resources for his or her own lifetime needs. However, given a nursing home placement that is expected to be a terminal and long-term, the parent may well wish to consider the transfer of excess assets to such a trust where needless spend-down on care is the only other alternative, and where the transfer of assets to the child outright is not appropriate either for purposes of benefits planning (see discussion at § 5.c. above) or due to concerns about the ability of the beneficiary to manage the assets appropriately.
It is presently an open question as to whether transfer by the applicant to such a trust for the benefit of a disabled person other than his or her own disabled son or daughter is disqualifying. While such a trust must be created by a parent, grandparent or guardian of the disabled individual, or by a court, there is no explicit requirement that the trust be funded by an individual in any of these relationships. Thus, we have had cases where trusts have been established by a parent but funded by a grandparent. However, MassHealth has argued in several recent fair hearings that such a transfer is disqualifying, as a matter of law.

7. Qualified Pooled Trust
a. Definition
i. A trust created by a non-profit organization for persons, of any age, with a disability meeting criteria for Social Security Disability or Supplemental Security Income benefits;
ii. Which maintains a separate account funded by the disabled individual, the individual’s parent or grandparent, the individual’s guardian, or by a court, for the sole benefit of the beneficiary (though pooled for management and investment purposes);
iii. Which provides for payments to the Commonwealth (and other states) from funds remaining in trust at the individual’s death in reimbursement for Medicaid services provided, less an amount retained by the Trust for its own charitable purposes, as determined by MassHealth to be reasonable and appropriate (in current practice, believed to be 25% in Massachusetts); and
iv. Which otherwise meets the requirements of 42 U.S.C. §1396p(d)(4)(C) and 130 CMR 515.001 and 520.023(D).
b. MassHealth Ramifications
i. A transfer to the Trust by a beneficiary under age 65 does not result in a period of ineligibility.
ii. It is presently uncertain as to whether a transfer to the Trust by a beneficiary age 65 and older results in a period of ineligibility. The federal law is ambiguous. Probably reflecting this, the federal Center for Medicaid Services has written a letter to the effect that the states may choose not to exempt transfers by persons age 65 and older. However, as of this writing, the Massachusetts regulations have not been amended to incorporate a specific limitation in this regard, and it appears that the pooled trust programs in Massachusetts (and at least some other states) continue to accept trust deposits from persons 65 and older.
iii. The Trustee having the discretion to distribute Trust principal or income to the MassHealth applicant or recipient does not result in Trust principal or income being countable.
iv. Distributions by the Trustee of principal or income directly to the MassHealth applicant or recipient are countable as income.
v. Distributions by the Trustee of principal or income to others for the purchase of goods or services to benefit the MassHealth applicant or recipient are not countable, since the regulatory definition of income for MassHealth purposes excludes the value of in-kind support.
vi. The state must be repaid before a Qualified Pooled Trust can be funded with the proceeds of a personal injury suit. 130 CMR 520.019(F).
c. Use. The most common use of the Qualified Pooled Trust is to provide a mechanism for the management of assets received by the MassHealth applicant or recipient from an inheritance or lawsuit recovery. (On the question of why use a trust at all under such circumstances, rather than retain the funds outright, see the discussion at § 5.c., above.) Since Qualified Self-Funded Trusts share this use, what reasons might there be to prefer one over the other? The Pooled Trust may be preferable under one or more of the following circumstances:
i. Where no MassHealth-permitted settlor (parent, grandparent or guardian), other than the court, are living, willing and able to establish a Special Needs Trust;
ii. Where the individual is 65 or older (but see § 6.b above);
iii. Where an independent, professional Trustee is preferred, usually for family reasons (foremost being anticipated difficulties in the relationship between the beneficiary and a family-member trustee) or because no family member is willing or able to assume the responsibilities of managing the trust;
iv. Where the beneficiary would benefit from the supports provided by many pooled trust programs, which may function somewhat like a social service agency.
v. Where the funds available to fund the trust are too little to make the management and investment of a single trust fund impractical or uneconomical.
vi. Where the beneficiary wishes to know that at least part of any funds remaining in his or her pooled trust account at his death will go to a charity to help other disabled individuals, rather than merely to reimburse Medicaid.


8. Non-qualified Pooled Trust
a. Definition: A trust created by an organization (usually non-profit) for the benefit of persons with needs as determined by the Trust, but which does not meet the age, disability, reimbursement and retention requirements and limitations applicable to a Qualified Pooled Trust and which therefore does not have the advantages of OBRA qualification. Such trusts usually authorize the organization to retain for its own charitable purposes a substantial portion of any funds remaining at the beneficiary’s death.
b. MassHealth Ramifications
i. If the trust is funded by a MassHealth applicant or member other than by Will, the action should be characterized as a transfer to a Retained Interest Trust. The transfer should not result in a period of ineligibility. However, trust principal would be considered a countable asset until spent down.
ii. If the trust is funded by lifetime transfer of a parent or grandparent who is a MassHealth applicant or member, the action would be characterized, as to the transferor, as a transfer to a Non-Retained Interest Trust. The transfer would result in a period of ineligibility if made within 60 months of application.
iii. With respect to the beneficiary, neither the principal nor the income of the Trust would be countable unless distributed to him or her, in which case it would be countable income. Distributions to third parties to pay for goods or services of benefit to the beneficiary, as in-kind income, should not be considered countable income.
c. Use. The primary use of a Non-Qualified Pooled Trust is to serve as a vehicle by which a parent provides supplemental support to a son or daughter, where non-profit agency management is desired or where the parent has no other remaindermen of concern. It is most often funded by pour-over from a Will, or by designation as the beneficiary of life insurance. Such trusts should not be confused with charitable remainder trusts, charitable annuity trusts or charitable unitrusts, which are intended to qualify the donor for certain income, gift or estate tax benefits. That a non-qualified pooled trust may designate a charitable remainderman does not result in any favorable (or unfavorable) tax treatment. A Non-Qualified Pooled Trust is not appropriate for funding by the MassHealth applicant or member, as the rules applicable to Retained Interest Trusts would apply, resulting in trust principal and income being countable on an open-ended basis, until exhausted.

9. Supplemental Needs Trust
a. Definition: A revocable or irrevocable trust established for the benefit of the MassHealth applicant or member but funded by someone else, usually a parent or other family member, and usually at death, to help meet the individual’s needs to the extent not covered by MassHealth or other entitlements.
b. MassHealth Ramifications
i. Funding of the trust by Will or by designation of the Trust as the beneficiary of life insurance or retirement assets is not a disqualifying transfer.
ii. Trust principal or income is not countable except to the extent that the trustee is obligated to distribute, or to the extent that trust principal or income, as the case may be, is actually distributed to the MassHealth applicant or member. The trustee having the discretion to distribute under any circumstances does not in itself result in income or principal being considered countable.
iii. Trust principal or income applied for the benefit of the MassHealth applicant or member, e.g., to pay for goods or services benefiting the MassHealth applicant or member, is not countable.
iv. Trust principal or income distributed to a person other than the MassHealth applicant or member under the terms of the trust is not a disqualifying transfer.
c. Use. The primary use of a Supplemental Needs Trust is to serve as a vehicle by which a parent arranges for future supplemental support to a son or daughter, where family or professional trust management is desired and where the parent has other remaindermen of concern. It is most often funded by pour-over from a Will, or by designation as the beneficiary of life insurance. A Supplemental Needs Trust is not appropriate for funding by the MassHealth applicant or member, since it would be treated as a Retained Interest Trust, interfering with eligibility. See § 2, above. Nor, given the absence of pay-back or other provisions, would it be appropriate for lifetime transfer by a parent seeking MassHealth eligibility for himself.

10. Gift-Tax-Qualified Trust
a. Definition: To qualify for the annual per-donee gift tax exclusion (currently of up to $13,000), gifts must be of a “present interest,” that is, of something that can be immediately accessed and used by the beneficiary. Therefore, ordinarily, transfers to a trust for the beneficiary, as gifts of a future interest, do not qualify. However, transfers to a trust meeting certain requirements (named for the court case in which the exception was established), do qualify. In a so-called Crummey trust to the extent that trust beneficiaries have the right to withdraw the amount of the gift for at least a minimum period of time after the gift is made.
b. Use: Crummey Trusts are used in conjunction with plans to reduce or eliminate the donor’s potential state or federal estate tax liability by reducing the size of the donor’s estate. Assets transferred to the trust may simply be accumulated and invested for future use in support of the beneficiary. Alternatively, the trust may be structured and managed so that gifted assets may be used to pay the premiums on life insurance policies owned by the trust (hence, the common name “life insurance trust”). Since the use of life insurance is common in estate planning for the benefit of children with disabilities, questions about the use of Crummey Trusts often arises in this context.
c. MassHealth ramifications: To the extent that a MassHealth member has the right to withdraw funds from the trust in conjunction with any gift to the trust, the amount he may withdraw is countable income for MassHealth purposes – almost always a problem for eligibility. To the extent that the member waives his right to make a withdrawal, his action may be characterized as a transfer of assets. This would be a problem for a MassHealth member concerned about nursing home placement or a member receiving services under a waiver, but not otherwise. Strategies to deal with eligibility issues include drafting the trust to limit the withdrawal right to persons specified in an instruction by the donor, or simply discontinuing gifts for any year in which a benefits problem exists.

11. Recipients’ Trust
a. Definition: a revocable or irrevocable trust established by the recipients of transfers.
b. MassHealth Ramifications
i. No effect on eligibility, as long as the recipient is not acting at the direction or upon the request of the individual or the individual’s spouse. 42 U.S.C. §1396p(d)(2)(A).
ii. N.B. Consider the appropriateness of transfer recipients having legal representation independent from that of the MassHealth applicant for purposes of the recipient’s decisions regarding the management or disposition of transferred funds.
c. Uses
i. Provides a mechanism for pooling, managing and controlling the ultimate disposition of transferred assets.
ii. Provides at least some protection for transferred funds from recipient legal, creditor or marital complications.

12. Trusts Created by Will
a. Definition: A trust created by will is a testamentary trust, that is, a trust established by the terms of a Will and funded by operation of the will.
b. Uses
i. Provides a mechanism for the supplemental support of the surviving spouse without adverse MassHealth effect.
ii. Provides a mechanism for the supplemental support of the surviving spouse without exposing the assets to creditor or marital risks in the hands of other family members during the surviving spouse’s lifetime.
iii. N.B. To accomplish either purpose, title of property formerly held jointly by husband and wife must be changed to individual ownership.
c. MassHealth Ramifications
i. Such a trust is intended to secure the benefits of a narrow exception to MassHealth trust requirements, under which a trust for a spouse is countable unless “by will.” The question has been open as to whether a revocable trust funded by pour-over from a will would also qualify under this exception. Massachusetts has historically taken the position that it does. However, the question of whether such pour-over arrangements qualify is again being raised, and the position we are taking is that only testamentary trusts should be relied upon in this context.
ii. Funding of the trust by Will is not a disqualifying transfer.
iii. Trust principal or income is not countable except to the extent that the trustee is obligated to distribute, or to the extent that trust principal or income, as the case may be, is actually distributed to the MassHealth applicant or member.
iv. Trust principal or income applied for the benefit of the MassHealth applicant or member, e.g., to pay for goods or services benefiting the MassHealth applicant or member, is not countable.
v. Trust principal or income distributed to a person other than the MassHealth applicant or member under the terms of the trust is not a disqualifying transfer.
vi. N.B. If the plan entails a revocable trust, be certain that the client understands the necessity of not funding the trust during lifetime, despite impact on probate status, or else trust principal and income will be countable against the eligibility of the surviving spouse.
vii. N.B. Assets added to a revocable trust by means other than pour- over from a Will, for example, as the result of the designation of the trust as beneficiary under a life insurance policy, pension, IRA or other tax-deferred account, do not come within the “by Will” exception and are therefore countable. If life insurance is to be used to fund the trust, make certain that the individual’s estate is designated as the beneficiary. While the estate may also be designated as the beneficiary of tax-deferred accounts, designation of the estate would entail generally serious and disadvantageous income tax consequences.





The Use of Trusts in Medicaid Planning: Postscript
Even if the client insists on a trust and it passes muster under OBRA ‘93 (as it is interpreted in Massachusetts), clients and the trustees of the trust should be advised of the additional burdens of administering a trust and the additional legal fees that will undoubtedly be incurred during the MassHealth application process. For many clients, trusts often evolve into nightmares. The client becomes uncertain or confused at every step: the forms or documents required to transfer assets to the trust, rights and responsibilities in the management of the trust, the preparation of trust accounts and fiduciary tax returns and finally the additional hurdles imposed in processing the MassHealth application. Even if the trust is expertly drafted, and long after the attorney’s active involvement in the case has ended, a client can eradicate all benefit achieved by inadvertently violating the terms of the trust and distributing principal to the grantor even though the trust prohibits such distributions; or by funding a trust intended to be funded only by Will. In sum, the client should only be offered the trust as a planning option if there is full disclosure of all the considerable risks as well as the potential benefits, and a mutual willingness on the part of the client and attorney to monitor trust utilization over time. If the client chooses the trust option, counsel should in any event provide clear instructions on its administration to avoid future MassHealth and tax complications.

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