A mistake many non-elder law and special needs practitioners made, especially early on, was to use so-called (d)(4)(A) trust forms for third-party special needs trusts. The problem with doing so is that it unnecessarily subjects any funds remaining upon the beneficiary’s death to repayment to Medicaid (MassHealth in Massachusetts) for the cost of services covered.
In a recent case, In the Matter of the Valerie R. Pecce Supplemental Needs Trust (Mass. App. Ct. 19-P-591, March 31, 2021), the trustee sought to reform such an erroneously-drafted trust in order to avoid payback to MassHealth upon the beneficiary’s death. The probate court rejected this effort finding that the trust grantor may well have intended to create a (d)(4)(A) trust in order to qualify for MassHealth himself.
On appeal, the Massachusetts Appeals Court agrees to reform the trust with respect to funds the grantor left at death, but not for those he funded during his life.
The Facts of the Case
In 2001, Albert Pecce created the Valerie R. Pecce Supplemental Needs Trust for the benefit of his disabled daughter, Valerie, and funded it with $200,000. The trust stated that it was established under 42U.S.C. §1396p(d)(4)(A), and the statute permits a Medicaid beneficiary to shelter her own assets and still receive Medicaid benefits. The law requires that the trust include a so-called “payback” provision that at the beneficiary’s death reimburses Medicaid for its health care expenses paid out on her behalf.
Albert died in 2007. Pursuant to his will, the rest of his estate also passed to Valerie’s trust.
Valerie died in 2015. Rather than pay out to MassHealth, the trustee, Gino DiGiacomo, sought to reform the trust to remove the payback provision, arguing that it was a mistake to have included it in the first place.
The Probate Court Decision
MassHealth opposed the reformation and also sought to remove DiGiacomo as trustee since in its view he was refusing to carry out the provisions of the trust. It argued that Albert intended to include the payback provision in the trust in order to qualify for MassHealth himself. Normally, anyone who transfers assets will be ineligible for MassHealth coverage of nursing home care for up to five years. However, transfers to a trust for the sole benefit of a disabled individual under the age of 65 are not subject to such a penalty. A (d)(4)(A) trust qualifies as a sole benefit trust. Therefore, MassHealth argued, Albert may well have intended to include the payback provision so that he could qualify for MassHealth coverage during the subsequent five years if necessary.
DiGiacomo argued that this could not be the case since Albert retained substantial assets in 2001, so he could not have intended to qualify for MassHealth during the subsequent five years.
The probate court, after a two-day trial, agreed with MassHealth, turning down DiGiacomo’s effort to reform the trust as well as removing him as trustee.
The Appeals Court Decision
The Appeals Court agrees with the probate court in part and reverses it in part. It agrees that Albert may well have intended to qualify for MassHealth during the five years following the creation of Valerie’s trust even though he retained substantial assets since he could always have transferred those additional assets to the trust should he have needed long-term care.
However, the Appeals Court sees no reason for the funds coming into the trust from Albert’s estate to have been subject to payback since after his death he could not qualify for MassHealth or be concerned about a transfer penalty. As a result, the Court orders reformation with regard to the funds coming from Albert’s estate in 2007, though not the $200,000 with which he originally funded Valerie’s trust.
The Court also reinstates DiGiacomo as trustee since it finds that, given the results, it was perfectly appropriate for him to seek reformation rather than paying out to MassHealth immediately.
In a cogently-worded dissent, Judge Peter J. Rubin argues that the payback provision should be struck entirely since it was never necessary to include it in the trust for Albert to avoid the transfer penalty. He argues (correctly) that in order to avoid such penalty, the trust need only be for the “sole benefit” of the disabled beneficiary and in order to qualify for such it can provide that at the beneficiary’s death any remaining funds be payable to her estate rather than to MassHealth. While that would subject the remaining trust assets to MassHealth estate recovery, such recovery is limited to MassHealth benefits paid after age 55, not during the beneficiary’s entire life, as a (d)(4)(A) trust provides.
While we don’t know the extent of MassHealth’s claim or the trust’s assets, this appears to be largely a victory for the trust given that it would appear that only the first $200,000 with which Albert funded the trust during his life will be subject to MassHealth reimbursement. It might even be less. We don’t know how much was spent on from the trust between 2001 and 2007 for Valerie’s benefit, but only whatever remained in the trust just prior to its funding from Albert’s estate should be paid over to MassHealth.
This case was successfully litigated by Attorney James R. Knudsen of Knudsen Burbridge in Wakefield.