State Court Exceeds Its Authority

I recently read a case that was interesting because it discussed the interplay of New Jersey’s Medicaid program and New Jersey’s trial courts. The case involved a special needs trust and distributions from the trust to the trust’s beneficiary, who was a recipient of Medicaid benefits.

New Jersey law permits a trustee to ask a court for guidance as to the appropriateness of making distributions. In other words, if a trustee wants to know if what he is about to do is appropriate, the trustee can file an action with the court and receive the court’s opinion as to the appropriateness of the distribution.

This is an important right of a trustee, because a trustee is a fiduciary. A fiduciary owes his beneficiary the highest duty of care. In the case of a trust, a trustee owes that high duty of care to the trust’s beneficiary. So, if a trustee makes a distribution from the trust that is imprudent, the trustee could be liable to the beneficiary.

In this case, the trust’s beneficiary was also a Medicaid beneficiary. If the trustee makes an imprudent distribution from the special needs trust to the trust’s beneficiary, the trust beneficiary could be kicked off Medicaid.

Medicaid is a health insurance program for needy individuals. Many Medicaid recipients have high medical bills, which the Medicaid program pays for them. If a Medicaid beneficiary lost her Medicaid benefits, because for instance, she received a distribution from a trust that was inappropriate, then the former Medicaid beneficiary could be on the hook for some very high medical bills.

In the recent New Jersey case that I read, the trustee of a special needs trust asked the court’s advice as to certain proposed distributions from the trust for the trust/Medicaid beneficiary. The court said that the distributions were appropriate and that the distributions would not impact the trust beneficiary’s eligibility for Medicaid.

What’s interesting about this case is that the court was both right and wrong at the same time making the same decision. The court was perfectly within its right and authority to make a decision that says “In my opinion, you, trustee, can make this distribution as I find it to be an appropriate distribution.” The court was also within its right and authority to say “In my opinion, the distribution will not affect the trust/Medicaid beneficiary’s eligibility for Medicaid benefits, so go ahead, trustee, and make this distribution.”

Once the trustee received that opinion, he was free to make the distribution and could not be found liable for having made an imprudent distribution for the trust.

Where the court exceeded its authority is when the court tried to bind the Medicaid office with its decision. The court held that Medicaid could not find the distributions to be something that would render the trust/Medicaid beneficiary ineligible for Medicaid benefits.

Such a decision is outside the scope of the court’s authority. A state trial court cannot bind the Medicaid office, even if the Medicaid office is put on notice of the action.

At the state-level, only the Medicaid office has the authority to make decisions regarding Medicaid eligibility, and if you are dissatisfied with that decision, then there is an appeals process that exists. But that appeals process does not involve a state trial court.

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