What is happening?
There has been a concerning trend with MassHealth’s treatment of irrevocable trusts. What once was a reliable asset protection strategy has now become a minefield of adverse and unlawful MassHealth decisions that result in benefit ineligibility.
In a nutshell, MassHealth caseworkers and hearing officers are denying MassHealth applicants eligibility because they are interpreting many irrevocable trusts to be countable. For example, MassHealth may deny a trust because the grantor retained the right to income, retained a special power of appointment, retained the right to substitute property, or because the grantor is also a trustee.
Consider the following hypothetical: John was in his mid-seventies when he transferred his home into an irrevocable trust, naming his daughter as trustee and his three children as beneficiaries. The trust allows John to reside in the home for the rest of his life. John also has a special power of appointment in the trust to amend the beneficiaries. John has no right to sell the home or mortgage the home.
This trust meets the IRS grantor trust regulations and therefore the children will receive a step-up in basis after John passes away. Transferring the home into the trust also starts the MassHealth five-year look-back clock on the home, so as long as John does not require long-term nursing home care within five years, the home is protected. Or is it?
What does this mean for MassHealth applicants?
John, now in his eighties, needs long-term care and has applied for MassHealth benefits. John funded his irrevocable trust ten years ago – well past the five-year look-back. MassHealth, however, has denied John eligibility because it has deemed the house in the trust to be a countable asset. MassHealth decided that the right to live in the house owned by the trust is essentially the same as John actually owning the house outright. According to the caseworker, John can obtain eligibility only if the house is returned to him free from the trust, thus allowing MassHealth to place a lien on it. John can appeal, but if he does not prevail, the house will be exposed to estate recovery and his estate plan will be essentially void.
Generally, a transfer into an irrevocable trust is disqualifying and starts the five-year clock for MassHealth eligibility. MassHealth has specific guidelines on treating assets in an irrevocable trust as non-countable. It is evident that MassHealth has taken an aggressive stance on certain trusts by ignoring the irrevocable transfer and is simply counting the trust asset as an available resource regardless of how long ago the trust was funded.
The critical issue is that MassHealth caseworkers are denying irrevocable trusts that are legally sound and within the irrevocable trust regulations regarding non-countable assets. A trust that consistently passed muster a few years ago is now under attack by the MassHealth administrator. This uncertainty leaves potential MassHealth applicants and their advocates concerned – to say the least.
What should an applicant do?
First, applicants for MassHealth should seek experienced legal advice regarding estate planning and asset protection strategies. It is critical that a trust be drafted properly to fit within the regulations, but also to address the shifting paradigm.
Second, a trust should be reviewed periodically to ensure the trust is still valid with current law and policies. Along this point, existing trusts must also be administered appropriately according to the trust provisions and trust law.
Finally, if MassHealth has issued a denial because of its interpretation of a trust, it is essential the applicant exercise his or her right to an appeal.
If you or your loved one has been denied MassHealth eligibility because of a trust, the right attorney with experience in estate planning and MassHealth benefits can represent you at a fair hearing and Superior Court, if necessary. MassHealth may be attacking valid trusts but we, as elder and disability attorneys, will vigorously advocate to protect your benefits and stand up to an agency encroaching on the rights of the MassHealth applicant.