In Simonsen v Bremby(2d Cir., No. 16-204-cv, Feb. 15, 2017), the daughter/Medicaid applicant filed suit in federal court and sought a preliminary injunction barring Medicaid from imposing a penalty period as a result of trusts established for her benefit by her mother. The two third-party trusts were considered as available resources by Medicaid, and when they were decanted into new third-party special needs trusts, Medicaid treated the decanting as a transfer of assets for less than fair market value.

The Connecticut Medicaid authorities had determined that the daughter’s interest as a beneficiary of the two “predecessor” trusts constituted her resources, and rendered her ineligible for Medicaid benefits.

The predecessor trusts had included “spendthrift” provisions preventing the beneficiary’s interest from being subject to creditors’ claims. Nevertheless, the Connecticut Department of Social Services concluded that the trusts were “support trusts” under state law, based on the following trust provision:

The trustee shall pay to my daughter or utilize for her benefit so much of the income and principal of her trust as the trustee deems necessary or advisable from time to time for her health, maintenance in reasonable comfort, education and best interests considering all of her resources known to the trustee and her ability to manage and use such funds for her benefits.

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[My daughter’s] health, happiness and best interests are to be considered foremost in priority over those who will receive the remaining trust funds on her death…. [Therefore] the trustee is encouraged to be liberal in its use of the funds for her even to the extent of the full expenditure thereof.

The U.S. District Court for the District of Connecticut had concluded that Medicaid’s interpretation of the trusts as resources constituted a “more restrictive” methodology than that employed for federal Social Security Income (“SSI”) eligibility. This “more restrictive” approach violates the federal requirement that state Medicaid plans adopt methodologies that are no more restrictive than the federal SSI standards.  Simonsen v. Bremby (D.Ct., No. 15-cv-1399, Dec. 23, 2015)..

On appeal, the Court of Appeals for the Second Circuit affirmed the district court ruling. Federal SSI regulations define a resource as “cash or other liquid assets or any real or personal property that an individual… owns and could convert to cash to be used for his or her support and maintenance.” 20 C.F.R. §416.1201. Property is a “resource” only if the Medicaid applicant has “the right, authority or power to liquidate the property or his or her share of the property.” 20 C.F.R. §416.1201(a)(1). The court further recognized that, according to the SSI Program Operations Manual System (“POMS”), which are the guidelines that interpret the SSI regulations, property is “available” if it is “(1) owned by an individual (2) who has the right, authority, or power to convert it to cash, and (3) who is not legally restricted from using it for her support and maintenance.”  The POMS further provides that property is not a resource if the beneficiary “is not legally able to transfer that interest to anyone else.”

The appeals court noted that the trusts in issue gave the beneficiary no authority to control or distribute trust principal; only the trustee had the authority to utilize the trust for the daughter’s benefit. Even assuming that the trust language authorizing the use of trust funds for the daughter’s support and welfare gave the daughter the right to sue the trustee to do so, the POMS dictate that an individual is “not require[d]… to undertake litigation in order to accomplish… access” to a resource.

The daughter had no authority to convert or transfer her interest in the trusts to herself or to anyone else. Consequently, even if the trusts could be deemed to be “support trusts,” she was nevertheless “legally restricted from using” the funds unless they were distributed to her upon the trustee’s discretion.

The Second Circuit Court of Appeals concluded that, because the daughter’s interest in the trusts would not be considered an available resource under the federal SSI program, the lower court’s finding that the trusts were not available under Connecticut’s Medicaid plan was not an abuse of discretion. It affirmed the grant of a preliminary injunction.

A copy of Simonsen v. Bremby can be found here – Simonsen v Bremby (2d Cir., No. 16-204-cv, Feb. 15, 2017).

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