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DC Court Rejects Family Trust of Massachusetts Appeal

By Harry S. Margolis

The U.S. Court of Appeals for the District of Columbia has rejected the Family Trust of Massachusetts‘ appeal of the denial of its petition to the IRS for tax exempt status. Family Trust of Massachusetts v. United States, DCA No. 12-5360, June 28, 2013.

The Family Trust of Massachusetts (FTM) is a pooled disability trust designed to shelter assets of MassHealth and Supplemental Security Income (SSI) beneficiaries so that they can qualify for public benefits while setting aside funds to be used for their wellbeing over and above the rather meager taxpayer-supported programs.

Pooled disability trusts qualify for an exception under 42 U.S.C. sec. 1396p(d)(4)(C) to the usual rule that applicants for MassHealth and SSI cannot shelter assets for their own benefit. Often called “(d)(4)(C)” trusts, to qualify for the exception the trusts must meet the following requirements:

  • The applicant for benefits must be permanently disabled and the trust funds must be for his or her sole benefit.
  • The trust must be “established and managed by a non-profit association.”
  • At the beneficiary’s death, any funds remaining in his or her account must be paid to the state’s Medicaid (MassHealth in Massachusetts) program up to the amount paid on the decedent’s behalf, except
  • To the extent such funds are retained by the trust.

The FTM has been very successful in attracting trust funds, especially from nursing home residents, in large part because it retains less of the decedent’s remaining funds than the other principal pooled disability trusts in eastern Massachusetts: the PLAN of Massachusetts and the CJP Disabilities Trust. Both of the latter trust retain 25% of such remaining funds while the FTM keeps between 5 and 20% depending on how long the trust has existed.

This lower retention rate is attractive to families doing long-term care planning who hope that some funds will be left over for them after the death of a nursing home resident. A somewhat oversimplified example can explain how this works:

Mrs. Jones moves to a nursing home that costs $12,000 a month. She has income of $2,000 a month and $225,000 in savings.  Thus, she must deplete her savings by $10,000 a month to pay for her care and will run out of money in about 22 months, at which point she will qualify for MassHealth coverage.

If instead, Mrs. Jones transfers her funds to a pooled disability trust, she will be immediately eligible for MassHealth.  She will continue to pay her $2,000 monthly income towards her cost of care and MassHealth will pay the difference. While the nursing home charges $12,000 a month on the private market, MassHealth pays less. For these purposes, we will assume that the MassHealth rate is $8,000 a month, which means that it pays $6,000 since Mrs. Jones is contributing $2,000 a month. If Mrs. Jones passes away after two years in the nursing home, the state’s out-of-pocket expense and claim against the trust will be $144,000 ($6,000 x 24).

Let’s assume that the trust has $200,000 remaining at this point, after some disbursements and payment of administrative costs. If the money is in the FTM, it will retain $20,000, $144,000 will be paid to MassHealth, and $36,000 will go to Mrs. Jones’ family ($200,000 – $144,000 – $20,000 = $36,000).  They will get more if she were to pass away sooner, since MassHealth would be owed less (and FTM’s reimbursement rate may be less, depending upon the timing) and nothing if she lives another half year or longer because MassHealth’s claim would eat up everything in the trust.

If Mrs. Jones, had made use of the other principal trusts in eastern Massachusetts, her family would receive virtually nothing after two years due to the trusts’ higher retention rate: $200,000 – $144,000 – $50,000 = $6,000.

This explanation of FTM’s popularity went on a bit longer than intended.  In any event, in order to qualify as a (d)(4)(C) trust, FTM must be organized and managed by a non-profit association.  In order to qualify as such, FTM applied for tax exempt status with the IRS, which failed to give an answer for many years, though indicating that it would reject FTM’s application. FTM sued the IRS for tax exempt status in the Federal District Court for the District of Columbia and lost. It then took this appeal to the Court of Appeals.

The Court of Appeals here rejects FTM’s claim for tax exempt status, finding in part:

To all appearances, FTM operates as a commercial, for-profit trustee. It charges fees to establish and manage the pooled trusts and retains residual funds—the “residuals”—from the accounts of deceased beneficiaries. As the . . . data show, FTM’s operations have consistently produced revenue in excess of expense:

. . .

        The charitable purpose of FTM’s operations is further undercut by the commercial trappings of its operations. The interrelationship between FTM and Macy’s law firm—FTM’s headquarters are in Macy’s law offices, he refers clients to FTM and he has performed legal services for it as well—cast FTM’s operations as a commercial offshoot of Macy’s elder law practice.

Unless the FTM appeals to the U.S. Supreme Court, it’s search for tax exempt status seems to be over. However, it’s not clear that this means it no longer qualifies as a (d)(4)(C) trust since the statute says nothing about IRS treatment as tax exempt. Perhaps it can be a “non-profit association” in Massachusetts without being a charitable organization for federal income tax purposes. On the other hand, Congress in creating the exception may have intended that these trusts be created by existing non-profits created for more general purposes, not simply to manage a pooled disability trust. We will have to wait for further developments.

Click here to learn more about pooled disability trusts.

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