The recent Massachusetts decision in Nadeau v. Thorne considering a primary residence held in a Grantor trust as an available resource and thereby disqualifying the Medicaid applicant has the Medicaid industry in turmoil. A careful review, however, will calm any fears that this in anyway changes what we have always known about Medicaid.
It is common that cases that come out of Massachusetts create ripples through America because of what appear to be extreme applications of Medicaid law. While we cannot ignore the Massachusetts courts, we must instead understand the theory in which they are able to make decisions such as these. First, Medicaid is federal law and, in accordance with USC 1396D, sets out all of the relevant laws related to Medicaid benefits. However, the federal Medicaid laws explicitly state that all interpretations of the law will be determined at the state level. That is where the leeway is granted for states to make decisions that would that otherwise appear extreme.
In the Nadeau case, the Court relies specifically on Massachusetts statute Section 130 Code Mass Regs 520.023(C)(1). The statute treats an applicant's "former home" that was deeded into an irrevocable trust differently from other assets. What's interesting about this case is nowhere does it discuss the exemption of the primary residence in determining the applicant's eligibility. It could be asserted therefore that under this specific Massachusetts regulation any primary residence deeded to a trust loses its residential exemption status for the applicant. Whether we agree with that or not is not our call, as the State of Massachusetts has the authority to interpret the federal regulations in this manner. So the Nadeau case in front of us really has little to no application outside of Massachusetts other than to force the rest of us to understand the context of the contextual authority of the individual state Medicaid agency.
A second element of this case is that the court was ready, willing and quickly abrogated interpretation of the federal Medicaid laws to the Medicaid department rather than to the court. Specifically stating, "this court must also give due weight to the expertise technical, competent and specialized knowledge of the agency as well as to the discretionary authority conferred upon it". The court relies on the former Doherty decision to reassert its authority that if applicant does not occupy their home then their home is available. Again the significant issue here is that it really does relate to the federal statute which says any right of the applicant to benefit in any way shall be deemed available to the maximum amount that the applicant can benefit. In this case the court took the use of the house and extended that to assess the full value of the home as countable. That's a stretch but nonetheless, regardless of this court's decision, Medicaid planning still allows one to place a house into an irrevocable trust as a viable planning technique. While most organizations will scream and yell and say no I propose three options in light of this case.
First, outside of Massachusetts one should feel relatively confident that they can continue to transfer a home to an irrevocable trust and reserve the right to live there in the trust without concern. What's unique in the Nadeau case is that there is a specific Massachusetts statute and case precedent which includes the home and does not provide as exemption under the federal statute. So to throw the baby out with the bathwater and stop doing this if you are not in the state that has such a specific statute would be an ultraconservative approach. A second option going forward is to continue to do Medicaid planning as you always have, continue to convey the home to the irrevocable trust but instead of reserving the right to live there, just create a simple lease agreement between the Medicaid applicant and the trust. This would eliminate the entire fact pattern that arose in the Nadeau case. In fact, the lease payments to the trust would not be considered uncompensated transfers and it would allow the grantor to still live in their house. The core elements will be that the Grantor/Medicaid applicant would have to pay all the expenses on the house and maintain the taxes, insurance, etc. and one should do his best to ensure that the value of the rental is an arm's length amount. And a third option is to convey the real estate to the trust but reserve a life estate to the grantor in the deed. This approach ensures that the "remainder interest" is conveyed to the trust, not the present interest, and no rights need be maintained under the trust for the benefit of the grantor. This is the simplest approach.
So if we look at cases like this it is important not to panic and run for the hills, remember your clients need you. They come to you for what you can do not for what you can't do and we as lawyers must analyze the law, examine our options and then implement a solution that the law and the client desires.
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David J. Zumpano, Esq, CPA, Co-founder Lawyers With Purpose, Founder and Senior Partner of Estate Planning Law Center
What happens when using the second and third option once the resident needs assisted living? Is the outcome the same in that they will lose the house if on Medicaid?
Posted by: Sara Johnston | 03/14/2016 at 05:23 PM