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Irrevocable Trust fails at Medicaid Planning

The Massachusetts appeals court recently held that even though an irrevocable, income-only trust expressly prohibited distributions of principal, other provisions in the trust could conceivably permit the trustees to invade trust assets, and thus the trust is countable for Medicaid purposes. Doherty v. Director of Medicaid (Mass. App. Ct., Essex, No. 08-P-939, June 18, 2009).

In 2000, Muriel Doherty amended her existing family trust, declaring the trust irrevocable. She also removed herself as trustee and directed the successor trustees to distribute only the trust’s income to her. The trust expressly stated that the trustees could “make no distributions of principal from the Trust, to or on behalf of” Ms. Doherty. After entering a nursing home in December 2005, Ms. Doherty applied for MassHealth/Medicaid benefits. MassHealth denied her application, concluding that, in at least some circumstances, the trust allowed Ms. Doherty’s trustees to distribute trust assets to her.

The superior court affirmed the benefit denial, agreeing with MassHealth that the trust’s prohibition against distributions cannot be read in isolation. For example, MassHealth pointed to a provision that the trustee may, “in its sole discretion” and notwithstanding “anything contained in this Trust Agreement” to the contrary, “pay over and distribute the entire principal of [the] Trust fund to the beneficiaries thereof…” so long as the trustees, “in [their] sole judgment,” determine that the “fund created … shall at any time be of a size which … shall make it inadvisable or unnecessary to continue such Trust fund.”

Another provision gives to the trustee the power to “determine all questions as between income and principal and to credit or charge to income or principal or to apportion between them any receipt or gain ….” The trust also specifically provides that Ms. Doherty has the power to appoint any part or all of the principal of the Trust fund to any one or more of her descendants or siblings.

Ms. Doherty appealed, arguing that these and similar provisions are, at most, administrative boilerplate that don’t allow the trustees any authority to invade principal in light of the explicit provision to the contrary. The Appeals Court of Massachusetts affirmed the benefit denial, finding that “the trust vehicle, considered as a whole, evidences Muriel’s expectation or intent that the trustees will invade trust assets when necessary to ensure Muriel’s comfort.” However, the court hastened to “stress that we have no doubt that self-settled, irrevocable trusts may, if so structured, so insulate trust assets that those assets will be deemed unavailable to the settlor.”

For a news article on the decision in the Boston Herald, click here.