Medicaid Gift Penalties Are Properly Imposed When Assets Are Transferred TO A Trust, Not When Distributions Are Made FROM A Trust

A.M. appealed a gift penalty imposed by the Medicaid agency based on a transfer of assets. The penalty was imposed based on $100,000 in distributions to beneficiaries of an irrevocable trust established by A.M. with her assets. A.M. asserted that the transfer penalty was inappropriate because she established the trust and transferred assets into the trust prior to the 5-year look-back period, while the Medicaid agency contended that the distributions are subject to a penalty because they were made during the look-back period.

In 2005, petitioner executed the A.M. Living Trust Under Agreement (the “Trust”). The Trust identified petitioner as grantor, her four children as beneficiaries, and two of the four children as Co-Trustees. On the same day, the petitioner transferred the remainder interest of her home into the Trust, while retaining a life estate in the home.

Section 2.1.1 of the Trust required the Co-Trustees to pay the income of the Trust to the petitioner to or for her benefit during her lifetime. Section 2.1.2 of the Trust stated “my Trustee shall not distribute any or all of the principal of this Trust to me or to my spouse under any circumstances whatsoever.” Upon termination, the Trust directed the Co-Trustees to “pay the principal and any accumulated or undistributed income of such trust to … [the beneficiaries, A.M.’s four children.] Section 4.7 stated that the Trust was irrevocable.

In 2010, the life estate was transferred to the Trust, and the remainder interest and the life estate were sold. The sales proceeds, totaling $250,452, were deposited into a bank account titled in the name of the Trust. The Trustees distributed $50,000 to the beneficiaries in 2013, and distributed another $50,000 to the beneficiaries in 2014.

In 2014, the Co-Trustees distributed almost $20,000 in income to A.M., and then terminated the Trust. In 2015, petitioner was admitted to a nursing home. The trust income distributed to A.M. in 2014 was used to pay facility costs. In 2017, petitioner applied for Medicaid benefits. When she filed the application, A.M. disclosed the existence of the Trust. Based on distributions of principal from the trust totaling $100,000 in 2013 and 2014 to the beneficiaries, Medicaid imposed a transfer of assets penalty of three-hundred days.

A.M. appealed the transfer of assets penalty. After holding a hearing, the administrative law judge (ALJ) reversed the agency’s decision. The ADJ analyzed the case, holding that (1) the Trust was irrevocable, (2) distributions from the Trust could not be made from the principal to or for the A.M.’s benefit under any circumstances, (3) the date of the transfer of assets was 2005 for the remainder interest in the home, and 2010 for the life estate, and, thus, (4)  the transfers of the assets were made beyond the five-year look-back period for petitioner’s 2017 Medicaid application. Therefore, the ALJ concluded that a transfer penalty could not be imposed on the distributions made to the Trust beneficiaries in 2013 and 2014.

Finally, because the income generated by the Trust assets was available to A.M. during her lifetime but ended when the trust was terminated, the ALJ ruled that a transfer of assets penalty should have been imposed based on the total projected amount of income that would have been received by A.M. had the trust not been terminated.

The ALJ’s Initial Decision is annexed here – A.M. v. Monmouth Cty Bd of Soc Svs, Docket No. HMA 9252-17 (Initial Decision)

The Final Agency Decision by the state Director of Medicaid, affirming the ALJ’s decision that a transfer of assets penalty SHOULD NOT have been imposed on the distributions made to Trust beneficiaries in 2013 and 2014, but a penalty SHOULD BE imposed based on the total projected amount of income that would have been received by A.M. had the distributions not been made, is annexed here –  A.M. v. Division of Medical Assistance and Health Services (Final Agency Decision)

For additional information concerning Medicaid applications and appeals, visit:

NJ Medicaid Applications

For additional information concerning Medicaid and public benefits planning, visit:

NJ Medicaid and Public Benefits Planning