Medicaid’s Treatment of Testamentary Trusts

Medicaid’s Treatment of Testamentary Trusts

By Donald D. Vanarelli, Esq.


Any estate or asset protection plan must be based on current federal and state law. However, public benefits laws, particularly Medicaid, are in a constant state of flux. Changes in the law may affect your estate or asset protection plan. It is vital that your elder law attorney keep abreast of changes in the law, and revise your estate/Medicaid plan to address those changes.

One recent example of a change in the law is the New Jersey Appellate Division case of Estate of DeMartino v. Division of Medical Assistance and Health Services, 373 N.J. Super 210 (App. Div. Nov. 10, 2004). As discussed below, for the first time, the appellate court in DeMartino permitted the Division of Medical Assistance and Health Services (“DMAHS”) to assert a lien for the recovery of Medicaid benefits against the assets of a testamentary trust established for the benefit of a Medicaid recipient by his late wife. You should discuss this important decision with your elder law attorney when formulating your estate/asset protection plan; if you already have an estate/asset protection plan in place, you should be aware that, if it includes a testamentary trust, the DeMartino case might affect your plan.

Estate Recovery:

States such as New Jersey that participate in the Medicaid program are required to enact provisions in order to recover from the estate of a deceased Medicaid recipient all monies expended on behalf of that recipient during the recipient’s lifetime. According to 42 U.S.C.A. § 1396p(b)(1)(B), “In the case of an individual who was 55 years of age or older when the individual received such medical assistance, the State shall seek adjustment or recovery from the individual’s estate.” Although the regulations that govern Medicaid recovery are complex, the basic estate recovery rule is that, if an individual has been a recipient of correctly paid Medicaid benefits on or after age 55, upon that recipient’s death, those benefits may be recoverable from the recipient’s estate, if he leaves no surviving spouse, child under age 21, or blind or disabled child. N.J.A.C. 10:49-14.1(a)-(d).

If a family member of the deceased Medicaid recipient resided in the recipient’s owned home at the time of the recipient’s death, a Medicaid lien may still be recorded, but will not be enforced until the property is sold or the family member dies or leaves the home. N.J.A.C. 10:49-14.1(g).

It is because of the Medicaid estate recovery provisions that every effort should be made to ensure that a Medicaid recipient will not have any assets in his name at his death, other than a small personal needs account. If the Medicaid recipient has assets in his “estate” at the time of death, those assets may be subject to Medicaid recovery. Because of this, the definition of “estate” becomes critical. As set forth below, the DeMartino case illustrates how broadly a Medicaid recipient’s “estate” may be defined.

What comprises an “estate”:

For purposes of Medicaid estate recovery, federal law permits states to define “estate” more expansively than the definition set forth in a state’s probate law. Pursuant to federal law, a Medicaid beneficiary’s “estate,” for purposes of the Medicaid recovery provisions, may include not only the real and personal property and assets within the individual’s probate estate, but also “any other real and personal property and other assets in which the Medicaid beneficiary had any legal title or interest at the time of death (to the extent of that interest), including such assets conveyed to a survivor, heir, or assign of the deceased individual through joint tenancy, tenancy in common, survivorship, life estate, living trust or other arrangement, as well as any proceeds from the sale of any such property which remain in the estate of the survivor, heir or assign of the beneficiary, to the extent of the beneficiary’s interest.” 42 U.S.C. § 1396p(b)(4)(B). New Jersey has adopted this more expansive definition of an “estate.” N.J.A.C. 10:49-14.1(l)(2).

“Other arrangement,” in turn, is defined to include, but is not limited to, “any trust or annuity in which the beneficiary had an interest at the time of death, including a trust or annuity established by a third party,” subject to exclusions. N.J.A.C. 10:49-14.1(l)(2)(ii). Notably, once such exclusion is that the term “estate” shall not include …”a testamentary trust established by a third party (including the spouse of the now-deceased Medicaid beneficiary) for the benefit of the now-deceased Medicaid beneficiary, provided that … the trust is a discretionary trust, constructed in such a way that the Medicaid beneficiary could not compel distributions … [and] the trust contains no assets in which the Medicaid beneficiary held any interest within either five years prior to applying for Medicaid … or five years prior to the beneficiary’s death.” N.J.A.C. 10:49-14.1(n)(3).

Because of the exclusion of such testamentary trusts from the definition of a Medicaid beneficiary’s estate (and thus from the Medicaid recovery provisions), elder law attorneys have, until now, recommended the use of testamentary trusts in certain situations. For example, because a Medicaid recipient is entitled to a statutory “elective share” upon the death of his spouse (called the “community spouse”), and those assets could ultimately be claimed by the Medicaid authorities to reimburse the state for the cost of the care provided to the institutionalized spouse, a Medicaid plan may have included the creation of a testamentary trust through the Last Will and Testament of a community spouse, whereby the amount required to satisfy the Medicaid recipient spouse’s elective share is held by the trustee for the Medicaid recipient’s special needs during his lifetime, and the amount remaining at his death is distributed to the couple’s children. Until the DeMartino case, the thinking had been that, because the assets would be in a testamentary trust, it would not be considered part of the institutionalized spouse’s “estate,” for purposes of Medicaid estate recovery.

That practice was challenged by the DMAHS in the DeMartino case, and the DMAHS ultimately succeeded in its position that assets of a testamentary trust established by a community spouse could be used by the DMAHS to recover Medicaid benefits paid to the institutionalized spouse.

The DeMartino Case:

In DeMartino, in September 1999, the husband, Michael DeMartino, gifted his interest in the couple’s home to his wife Anne (the community spouse). He entered a nursing home on April 1, 2000 and began receiving Medicaid benefits. His wife died on October 29, 2000. In her will, she created a testamentary trust for the husband. Under the testamentary trust, that portion of her residuary estate equaling the husband’s elective share was placed in the trust. The husband received the income from the trust in installments, and the trustee was given sole and absolute discretion to distribute principal for the husband’s “special nonsupport needs.” The will provided that, upon the husband’s death, the remainder of the trust would be distributed to the couple’s children.

When the husband died on May 6, 2001, the aforementioned testamentary trust had not yet been funded. Thereafter, the DMAHS sought to assert a claim against the husband’s estate, including against the assets in the testamentary trust. The husband’s estate, in turn, claimed that the DMAHS could not assert a lien on the property because the husband had no legal interest in the trust assets at the time of his death. The estate also claimed that provisions of N.J.A.C. 10:49-14.1(n), which defines the term “estate” to include assets in certain testamentary trusts (in particular, those trust assets in which the Medicaid recipient had an interest within a five-year “look-back” period), to be invalid.

The Appellate Division rejected the husband’s estate’s challenge to N.J.A.C. 10:49-14.1(n), finding that federal law permits states to adopt broadened definitions of “estate,” which may include “assets conveyed to a survivor … of the deceased individual through joint tenancy, tenancy in common, survivorship, life estate, living trust, or other arrangement.” 42 U.S.C. § 1396p(b)(4)(B) (emphasis supplied).

The DeMartino court concluded that the assets of the testamentary trust were part of the husband’s “estate” upon his death:

Rather than make an outright bequest to Michael of the [elective share] monies, Anne placed Michael’s elective share in a trust…. But for the trust arrangement, Michael’s elective share would have been part of his own estate…. By establishing a trust, … Michael’s assets were transferred to his heirs upon his death. In our view, a testamentary trust of the sort employed here qualifies as an “arrangement” for the conveyance of the assets of a Medicaid beneficiary within the meaning and intent of 42 U.S.C. § 1396p(b)(4)(B).

The court found that, although the trust was created by a third party, as opposed to the Medicaid recipient, “a testamentary trust that effects the transfer of the recipient’s assets to his survivors, heirs or assigns, is similar in purpose and effect to the forms of conveyance mentioned in 42 U.S.C. § 1396(b)(4)(B).” It concluded that, “When assets of a Medicaid recipient are conveyed to a survivor, heir or assign by such an “arrangement,” the assets remain part of the recipient’s “estate” pursuant to 42 U.S.C. § 1396p(b)(4)(A) and N.J.S.A. 30:4D-7.2(a)(3).”


Those formulating an estate/asset protection plan should be mindful of the DeMartino case, which permitted the DMAHS to assert a lien for the recovery of Medicaid benefits against the assets of a testamentary trust established by a Medicaid recipient’s spouse. Those who have already developed an estate/asset protection plan should be aware that, if it includes a testamentary trust, the DeMartinocase might affect that plan. This is a complicated case that warrants a discussion with your attorney. End of article icon.



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