Denial of Medicaid Eligibility After Court Reforms Testamentary Trusts in Parents' Wills to Special Needs Trusts Reversed on Appeal

In the ec-v-division-of-medical-assistance-and-heath-services case, the petitioner E.C. was a 67 year old physically and developmentally disabled woman who resided in a nursing home. Both of her parents were deceased. The parents had established testamentary trusts in both of their wills for the benefit of E.C. and her two brothers. The trusts gave discretion to the trustees to distribute the trust assets as the “trustee believes desirable from time to time for the health, support, in reasonable comfort, best interests, and welfare” of the beneficiaries “considering all circumstances and factors deemed pertinent by [the] trustee.” Although the trustee of the original trust was not required to use any of the trust funds for E.C.’s benefit, the trustee had been using the trust fund to pay the charges incurred by E.C. in the nursing home in which she resided up to the time that the trust was reformed by the court.

Years after the parents’ deaths, Hon. Harriet Derman, J.S.C., a judge of the Superior Court in Somerset County, entered an Order reforming the trust as requested by the beneficiaries to make it consistent with the testators’ probable intent. The result of the reformation was the creation and funding of three subtrusts, one for each of the beneficiaries, with the distribution standards in E.C.’s subtrust changed to permit the Trustee to make distributions to E.C. as the Trustee “in the Trustee’s sole and nonreviewable discretion shall deem to be in the best interests of E.C.” Further, in the reformed trust the Trustee was also permitted to take E.C. eligibility for Medicaid and other government aid into consideration in making distributions to E.C. After the trust was reformed, payments to E.C.’s nursing home stopped.

E.C. then applied for Medicaid benefits. At that time, the value of the assets in the E.C.’s reformed trust was $168,05.75. The Division of Medical Assistance and Health Services (DMAHS) denied the claim, ruling that the reformation of the trust was an impermissible transfer of assets for less than fair market value, or gift, rendering E.C. ineligible. E.C. filed an appeal of the denial of Medicaid benefits.

On appeal, the parties filed for summary judgment. The administrative law judge entered an Order reversing the decision denying eligibility made by DMAHS. The Court ruled that both the original trust and the reformed trust were inaccessible to E.C., and therefore exempt, and should not have been considered in determining E.C.’s eligible for benefits. According to the Court, the distribution standards in the original trust, although containing language which seemed to make them  support trusts, and therefore countable, were actually discretionary trusts, and therefore noncountable, because the testators named multiple beneficiaries, none of whose interests were to take priority over any other beneficiary. The court quoted a Pennsylvania case as follows:

If he had intended the entire principal of the trust to be available for the support of his one handicapped son, so that the entire principal would have to be exhausted before his son could receive state-provided care in the for of medical assistance, he would likely have created a trust for that son alone and separate trusts for his other children. Estate of Rosenberg v. Department of Public Welfare, 679 A.2d. 767, 769 (Pa. 1996)

The court also held that the reformed trusts were also exempt and merely served to clarify the testators’ intent to establish discretionary trusts. Now we have to see whether DMAHS files exceptions and whether the Director of Medicaid affirms the administrative law judge’s decision.