We recently reported on a superior court decision upholding an irrevocable trust designed to shelter assets as part of long-term care planning. (Click here to read the blog post.) Unfortunately, we have become aware of another decision upholding one of MassHealth arguments against irrevocable trusts, one we felt was so contrary to established trust law that no court would ever go along with it.
In Rita E. Sands vs. Commonwealth of Massachuesetts, Executive Office of Health and Human Services, Office of Medicaid (Suffolk Sup. Ct. CA No. SUCV 2013-3537-A, April 28, 2014), Judge Douglas H. Wilkins holds that all of the funds in an irrevocable income-only trust are available to the trust’s grantor because the trustee may purchase an annuity, thus converting unavailable principal to available income.
On October 4, 2007, Rita Sands established her irrevocable trust, appointing her nephew as trustee and transferring in her home in Needham. She retained the right to income, but not to principal distributions, and the right to use and occupy any home owned by the trust. The trust provided that the trustee could make distributions to the remainderman — those to receive the trust property after her death — during her life, but only subject to Ms. Sands’ approval. She also retained the right to change both the lifetime beneficiaries of the trust and those to receive the trust property upon her death.
In addition, the trust explicitly permits the trustee to invest in annuities and empowers him to determine what “receipts constitute principal or income.”
Ms. Sands moved to St. Patrick’s Manor in Framingham at the end of 2009 and since then has paid more than $400,000 for her care. On December 4, 2012, she applied for MassHealth coverage. Her application was denied and she filed a fair hearing appeal, which she also lost, the hearing officer finding that the combination of the trustee’s ability to sell assets and to determine what part of the receipts are income and principal would permit the trustee to “for example, purchase an annuity, and construe the annuity payments as income for the benefit of the appellant.” Further,
Notwithstanding the language in trust purporting to prevent distribution of principal to the appellant, I find that when read as a whole, there are circumstances under which the trustee could use the trust assets for [the applicant’s] benefit. Accordingly, all of the trust assets and income are considered countable to her for MassHealth purposes.
Judge Wilkins in ruling on the 30A appeal to Superior Court essentially agrees with the fair hearing officer, but doesn’t go quite as far. His reasoning is as follows:
First, the job of MassHealth is to determine the maximum extent to which the trustee may make distributions to Ms. Sands.
Second, he rejects the cases cited by Ms. Sands as establishing that the trustee’s fiduciary duty limits his discretion in allocating income and principal, distinguishing them as not involving self-settled trusts and not concerned with MassHealth eligibility. He does, however, acknowledge that in each of the cases cited, “the court found that the intent of the grantor, construed from the particular facts and circumstances at hand, ultimately controlled the determination of how much discretion the trustee had.” Interestingly, he never mentions the grantor’s intent, a fundamental doctrine of trust interpretation, again.
Third, Judge Wilkins points out that while the trustee has a duty to the remainderman as well as to Ms. Sands, this is trumped to some extent by Ms. Sands’ retained power to reallocate the trust proceeds among the remaindermen.
Fourth, Judge Wilkins differs from the fair hearing officer in agreeing with Ms. Sands that certain provisions of the Uniform Trust Act “prevent[] the trustee from deeming all of an annuity payment as income and shifting the entire benefit of the Trust to Sands.”
But, fifth, Judge Wilkins agrees with MassHealth’s argument that the trustee can purchase an annuity and characterize the income stream as income to Ms. Sands.
While the Trust provisions quoted by the hearing officer (Article XIV.1) may not support her inclusion of the entire Trust in countable assets, the Trustee certainly has discretion to pay Sands substantially more than the maximum $2,000 allowed. Sands’ arguments have some merit — particularly as to inclusion of the entire trust corpus — but do not succeed in reducing her countable assets to “income generated by the Trust.”
So, the question in this case comes down to what the trustee may invest in and what he may characterize as income.Judge Wilkins finds that the trustee may invest in annuities and deem the entire annuity payment to be income.
The first place where I would differ with Judge Wilkins has to do with whether the trustee would violate his fiduciary duty to the remaindermen and the purpose of the trust if he were to purchase an immediate annuity. Here, the judge does not seem to understand the difference between a deferred annuity, which is a tax preferenced investment vehicle and an immediate annuity which is a contract with an insurance company under which in exchange for a lumpsum payment it agrees to make monthly payments to the purchaser for a period of time or for the purchaser’s lifetime. Since an immediate annuity disappears after its term has expired, its purchase would eliminate the remaindermen’s interest and clearly violate the duty owed to them by the trustee. While we can argue whether it would be prudent for a trustee to invest in a tax-deferred annuity, it is difficult to see the purchase of an immediate annuity as within the trustee’s discretion.
The second place where I would disagree with Judge Wilkins is whether all of the annuity payments, were the trustee to purchase an immediate annuity, would be income under the terms of the trust. This is a closer issue because definitions of income differ from setting to setting. For instance, if Ms. Sands herself were to own an immediate annuity, MassHealth would consider the monthly payments to be income. However, the IRS would not. It would only tax the portion of the annuity payments that exceed the purchase price of the annuity. The balance of the payments is considerered the return of principal. The IRS treatment of the annuity payments is consistent with trust fiduciary accouning practices and would be one way the purchase of an annuity would not harm the interests of the remaindermen. That is, if the trustee distributed the income portion of each payment to Ms. Sands and retained and reinvested the portion of each payment attributable to a return of principal. For instance, if an annuity was paying the trust $1,000 a month, $950 might be considered return of principal to be retained by the trust and $50 a month as earning to be distributed to Ms. Sands.
Finally, Judge Wilkins seems not to understand the distinction between income and principal in terms of MassHealth eligibility. While countable assets in excess of $2,000 will make a nursing home resident ineligible for MassHealth coverage, monthly income in excess of this amount will not. Instead, the nursing home resident must contribute her income to her cost of care. Judge Wilkins finds that only the income from the theoretical annuity payment would be available to Ms. Sands, not the entire trust corpus. In that case, Ms. Sands should be eligible for benefits, but her monthly contribution to her cost of care should include the maximum monthly payment that the trustee can find in the annuity market. At least that is the logical conclusion from Judge Wilkin’s reasoning.
