Medicaid Applicant’s Assets Placed in Trust for Child Support are Not “Available” in Calculating Medicaid Eligibility

Medicaid Eligibility and Child Support Illustration.

Appellate Division Reverses Final Agency Decision

W.F. is a legally incapacitated person who has been living in a nursing home for several years. Approximately ten years before he became incapacitated, he and his wife divorced and entered into a property settlement agreement (“PSA”). Under the PSA, W.F. was to pay approximately $23,000 per year in child support for his two minor children.

After he became ill, his assets were insufficient to pay for both his child support obligation and his nursing home care. Therefore, his guardian created a “Family Trust,” which was approved by the Superior Court, Chancery Division. The Family Trust was irrevocable, and specified that the trust funds could only be used for the children’s needs, and not for W.F.

The guardian then applied for Medicaid benefits on W.F.’s behalf.

Medicaid advised the guardian that it viewed the Family Trust as a gift to the children (which would subject it to a Medicaid penalty). Therefore, the guardian filed another action in the Chancery Division. At the suggestion of the guardian ad litem (“GAL”) for the children, the Chancery Court approved the division of the assets through trusts into three equal shares: one-third for the nursing home and counsel fees; and one-third each for W.F.’s two children. The children’s shares were ordered into new trusts for the children.

The guardian then reapplied for Medicaid benefits on W.F.’s behalf.

Medicaid maintained its position that the funds were “available” to W.F., and imposed a “transfer penalty” reducing W.F.’s Medicaid benefits.

The guardian appealed the decision through a Medicaid “fair hearing” before an administrative law judge (“ALJ”), which ruled that the transfer was proper and not subject to a transfer penalty.

However, the Division of Medical Assistance and Health Services (“DMAHS”) Assistant Commissioner issued a final agency decision disagreeing with the ALJ, and reinstating the transfer penalty.

The guardian then appealed to the Superior Court, Appellate Division.

On appeal, the Appellate Division reviewed current Medicaid law. It noted that only “available” resources are countable in determining Medicaid eligibility, and a resource is available if the applicant has the “right, authority or power to liquidate” that property. Even if otherwise eligible for Medicaid, a transfer penalty of ineligibility will be applied if the applicant “disposed of assets for less than fair market value” during the five-year “look-back” period. Medicaid regulations state that,

Any applicant or beneficiary may rebut the presumption that assets were transferred to establish Medicaid eligibility by presenting convincing evidence that the assets were transferred exclusively (that is, solely) for some other purpose….

Although the appellate court acknowledged that it owes deference to DMAHS’s expertise in Medicaid, it also recognized that an administrative agency decision will be reversed if it is “arbitrary, capricious, or unreasonable, or … lacks fair support in the record.” Here, the court concluded that the DMAHS Assistant Commissioner’s decision to impose a transfer penalty “misapplied the legal standards of eligibility to the circumstances of this case, and, moreover, was arbitrary and capricious.”

In particular, the appellate court concluded that the Medicaid agency unreasonably classified the court-ordered transfer as a “gift,” because W.F. had no control over those funds. The Chancery Division had adopted the proposal of the GAL, not those of W.F. or his guardian, in ordering that the Family Trust be divided into thirds. Moreover, when deciding if a transaction is subject to a transfer penalty, Medicaid regulations state that a transfer that is court-ordered is a factor that may support the conclusion that a transfer was exclusively for some purpose other than to establish Medicaid eligibility. Thus, the Appellate Division concluded that,

Simply stated, the Division has misconceived the nature of the Chancery judge’s reformation of the Family Trust into trusts to benefit the two children. The payments were not a gift directed by W.F. or his personal guardian. As such, as a matter of law, they were not “available” assets in calculating W.F.’s Medicaid eligibility.

Consequently, the final agency decision imposing a transfer penalty was reversed.

A copy of the Appellate Division decision of W.F. v. Morris County Department of Family Services can be found here.

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