On May 30 the Massachusetts Supreme Judicial Court published their decision on Daley v. Secretary of the Executive Office of Health and Human Services. The case focused on two common estate planning techniques that elders can use to protect their homes from long-term care expenses. The decision actually applied to two combined cases, the Nadeau case and the Daley case.
But first, a bit of context
Without any planning, if an elder requires a nursing home level of care, they must use substantially all of their own money to pay for that care. Then when they run out of money, they can apply for MassHealth (Medicaid) to pay for their care. However, if the elder owns their home, then MassHealth will place a lien on the home and force a sale after the elder dies, in order to recoup their costs.
To avoid a Medicaid lien and estate recovery many elders place their homes in irrevocable trusts. These Medicaid Trusts have evolved over the years in response to changes in Medicaid eligibility rules. The recent court case focused on two potential provisions in this type of planning.
The specific techniques at issue
In the Nadeau case the SJC considered a provision in a trust that specifically granted an elder the right to reside and enjoy the home for the rest of his life. MassHealth argued that this provision gave the elder so much access to the trust that it should count as an asset when determining the elder’s eligibility for Medicaid.
Second, in the Daley case the SJC considered an elder’s retention of a life estate while placing the remainder interest of the home into an irrevocable trust. MassHealth again argued that the home should count as an asset.
In both scenarios the SJC ruled against MassHealth, which may at first seem like a victory for Medicaid planning. However, on further analysis the SJC actually invited MassHealth to further challenge these techniques.
In the Nadeau case the SJC ruled that the right to use and occupy the home did not render the home a countable asset. But the SJC also ruled that the right to use and occupy the home was akin to receiving fair market value rental income from the home. The kicker is that if a Medicaid applicant’s income is too high, they must pay a monthly deductible in order to qualify for benefits. And if the income isn’t real, but only imputed from the right to use the home, then the applicant may not have the funds to make this payment. This could potentially force the trust either sell or rent out the home in order to generate income. In a way, it could create a whole class of nursing home resident landlords.
In the Daley case, the SJC ruled that a life estate didn’t cause the whole home to be considered a countable asset for Medicaid. But they also seemed to suggest that the life estate itself has value, and that although MassHealth does not currently count the value of a life estate as an asset, they could decide to do so in the future.
The Nadeau trust had another potential pitfall in that the elders who established the trust were allowed to grant trust property to “non-profit organizations”. This was likely included to allow the Nadeaus to make charitable gifts. However, the SJC noted that one-fourth of nursing homes are actually non-profits, which could invalidate the protection of the trust.
Both the Nadeau and Daley trusts allowed the trustees to distribute principal to the elders so that they could pay any income tax liability generated by the trust. The SJC asked MassHealth to calculate whether and how much of the trust would be countable based on these provisions.
So, to summarize, at face value the SJC seemed to support the following:
- Trust provisions specifically allowing the use and occupancy of the home
- Retained life estates in the home
But in reality the SJC invited MassHealth to attack Medicaid planning on the following grounds:
- The right to use and occupancy is imputed income which could require an increased monthly deductible;
- A retained life estate is a valuable asset which could be countable in determining eligibility;
- A power to grant trust assets to non-profit beneficiaries could make the trust countable;
- The ability of a trust to pay principal to cover tax liabilities could make the trust partially countable.
So, what should people do?
Because of this increased scrutiny, and potential for danger in Medicaid planning, elders and their families should be certain that their attorneys are true experts in this field. All of the dangers listed above can be mitigated or avoided entirely, but an unwary advisor might never have considered them.
Further, regardless of the level of expertise of the drafting attorney, older Medicaid trusts should be reviewed to ensure compliance with current laws. When the trusts at issue in this case were drafted, they likely complied with the state of the law at that time. However, this is an evolving field of law, and old trusts often contain unknown pitfalls.