Changing the Terms of a Trust

A case recently decided by a court in Massachusetts reminds me of an interesting issue affecting the Medicaid program here in New Jersey.  In the Massachusetts case, a man was the beneficiary of a trust that he created.  The trust held various assets and the terms of the trust said that those assets were to be held for the man’s benefit.

Under the laws governing the Medicaid program, since the assets of the trust were available to the man, the assets of the trust counted against the man for purposes of determining his eligibility for the Medicaid program.  In other words, if the terms of a trust say that the assets of the trust can be used to pay for items that the trust’s beneficiary may need, then the assets of the trust are, for all intents and purposes, the trust beneficiary’s assets.  If the assets of the trust exceed the asset limits for the Medicaid program (which in New Jersey is $2,000), then the trust’s beneficiary will not be eligible for Medicaid benefits.

In the Massachusetts case, the man filed an action in court and reformed the trust.  A trust reformation action is a court proceeding through which a person attempts to change the terms of the trust to conform to the purpose for which the trust was established.  For instance, perhaps a trust was drafted poorly and the terms of the trust fail to implement effectively the purpose for which the person who established the trust had in mind.

Through a reformation action, the court changes the terms of the trust to conform to the true intentions of the person who established the trust, as those intentions have been shown to the court.  Once reformed, the trust no longer says what it used to say; the trust now says what the court says the trust should have said.  The terms of the trust are changed to carry out the true intentions of the trust’s creator.

The Massachusetts man did obtain a court order reforming his trust.  In that case, the trust that held assets that were wholly available to the man was changed to a trust that did not permit any distributions to the man.  Since the trust no longer permitted distributions to the man, the man argued that the trust’s assets were unavailable to him as far as the Medicaid program should be concerned.

Of course, if the trust had initially stated that the assets of the trust were unavailable to the man, then the trust’s assets would not have disqualified the man from Medicaid.  So, it is logical to argue that a reformed trust the terms of which do not permit trust assets to be used for the man similarly makes the assets of the trust unavailable to him.

The court in Massachusetts saw things differently.  Essentially, the court imposed an asset transfer penalty against the man, rendering the man ineligible for Medicaid as if he had gifted assets away from himself by making the trust assets unavailable to him.

The court reasoned that if someone could simply reform a trust to prevent the assets of the trust that were previously available to him now unavailable to him, then wealthy people could benefit from their money and at the last minute reform their trusts to make their wealth unavailable to them.

Reformation actions are often used by elder law attorneys.  Typically, the attorney is seeking to reform a poorly drafted trust that inadvertently makes the assets of a trust available to a disabled individual.  For instance, mom established a trust in her Will for her disabled daughter, but after her death, it is discovered that the trust in her Will was poorly drafted and the Medicaid office is counting the assets of the trust against the daughter.

In cases such as this, a reformation action is appropriate, and the State should honor the reformation.  In the Massachusetts case, I would have to agree with the conclusion of the court.  A person cannot create a trust for himself, benefit from the assets of the trust, then have the trust modified at the last minute, claiming that the trust’s assets are no longer available to him.

The Massachusetts case is simply an example of bad facts making bad law.

What Is a Guardianship?

For those of you interested in elder law, here is an excerpt from my book, entitled New Jersey Elder Law: A Resource and Planning Guide.  The book is available at http://www.lawjournalpress.com/.

5-1         What Is a Guardianship?

A guardianship is an involuntary court proceeding through which one (or more) person, called the “petitioner,” seeks to have a court appoint him as the guardian of another person, called the “ward.”[1] A guardian[2] is someone who manages the affairs—sometimes the financial affairs, sometimes the residential and health-related affairs, sometimes both—of the ward.

A guardianship is involuntary because the ward does not consent to the guardianship; in fact, a prospective ward cannot simply consent to a guardianship.[3] A court must adjudicate the ward as being an incapacitated individual who is incapable of handling his affairs in order for a guardian to be appointed for the ward. The court is required to follow certain procedures before it can enter a judgment of incapacity,[4] which will be discussed below.

In most instances, a well-drafted financial power of attorney document[5] and advance healthcare directive[6] can stave off the need to have a guardian appointed for a person. With a power of attorney and healthcare directive, the nominated agent can make most of the decisions that will ever have to be made for the principal, so even if the principal becomes incapacitated after signing the power of attorney and healthcare directive, the agent can make whatever decision may need to be made for the principal.

This is not universally the case. Sometimes, a power of attorney document is not well-drafted and fails to address a certain financial transaction that the agent may need to conduct for the principal, for instance, the power of attorney document may inadequately address the agent’s authority over the principal’s retirement accounts and the custodian of those retirement accounts may refuse to honor the agent’s request with regard to the accounts due to the power of attorney document being inappropriately drafted.

Alternatively, the principal may be engaging in actions that are dangerous to his safety or the safety of others, yet he may refuse to obtain necessary care, such as a home health aide or the services of an assisted living residence. For instance, the principal may be living alone in his home, regularly falling or leaving the gas stove on. This behavior is common for people with dementia, yet people in these circumstances often refuse care; they refuse a home health aide, they refuse to live in an assisted living residence. In these circumstances, a guardianship may be necessary even if the principal has signed a well-drafted power of attorney and advance healthcare directive. An agent under a power of attorney and advance healthcare directive cannot force the principal to do anything. In fact, even if the principal is patently mentally incapacitated, unless a court has adjudicated the principal to be incapacitated, he retains the right to revoke the power of attorney[7] and healthcare directive.[8] So, not only could the principal refuse to obey the agent’s requests, the principal could simply revoke the power of attorney and advance healthcare directive, leaving the agent with no authority whatsoever.

Unless a court has adjudicated the principal as being an incapacitated person, whether the principal retains capacity is a question of fact that must be resolved by a court. An adjudication of incapacity is not something that is decided by popular decision, so while all of the principal’s family members and friends may believe he is incapable of making his own decisions, if the principal does not believe that, he is free to make any decision he wants, irrespective as to whether that decision is good or bad. People make bad decisions all the time. Sometimes, the same person continuously makes bad decisions. But bad decisions do not equate to incapacity in all circumstances, though those decisions may be an indication of a problem.

Once a court has adjudicated a ward to be an incapacitated individual, the ward lacks the legal authority to refuse the decisions that his guardian has made for him,[9] and unless the ward can prove that he has regained his capacity[10] and a court has adjudicated a return to capacity, the guardian, not the ward, makes decisions for the ward.

Now there is certainly a difference between legal authority and practical authority. For instance, if dad’s home is cluttered with garbage and he continuously engages in unsafe behavior, such as leaving the gas stove running, his guardian can decide to place dad in an assisted living residence. The guardian has the legal authority to make that decision. But from a practical standpoint, if he does not want to go live in the assisted living residence, then the assisted living residence may not want him. A facility doesn’t want a resident who doesn’t want to be there if the resident’s behavior is disruptive to staff and other residents.

So, there is a difference between legal authority and the practical application of authority of which the reader should be aware. A general (or full) guardianship gives the guardian authority to make all decisions for his ward—financial decisions, healthcare decisions, and residential decisions—but the legal authority to make decisions is not necessarily the end-all and be-all to every issue that may arise regarding care decisions for an incapacitated individual.

[1]. N.J.S.A. 3B:1-2 (“Ward”).

 

[2]. N.J.S.A. 3B:1-1 (“Guardian”).

 

[3]. In the Matter of the Guardianship of Walter J. Macak, 377 N.J. Super. 167, 175 (App. Div. 2005).

 

[4]. R. 4:86-1 et seq.

 

[5]. N.J.S.A. 46:2B-8.1. et seq.

 

[6]. N.J.S.A. 26:2H-54. et seq.

 

[7]. N.J.S.A. 46:2B-8.10.

 

[8]. N.J.S.A. 26:2H-105(a).

 

[9] . N.J.S.A. 3B:12-36, 3B:12-38, but see 3B:12-56(d) (requiring a guardian to obtain court approval before voluntarily committing a ward to a psychiatric facility and prohibiting the guardian from continuing that commitment if the ward objects).

 

[10]. N.J.S.A. 3B:12-28, R. 4:86-7.

 

Estate Recovery Overreach

Medicaid is a health payment program for needy individuals. In other words, if a person meets the criteria for eligibility, Medicaid will pay for the necessary health services that the individual requires.

Medicaid will pay for long-term care, such as care in a nursing home. For this reason, many people who never thought they might need or want to qualify for Medicaid find themselves needing to or wanting to qualify. After all, if you were faced with a $10,000 a month nursing home bill with no end to your monthly payments in sight, you would want to qualify for a program that would help you pay that bill.

A large part of my practice involves Medicaid planning. Medicaid planning is designed to assist an individual with qualifying for Medicaid sooner than he would qualify without planning and while preserving a portion of his estate to help supplement his needs or the needs of his family. The typical Medicaid planning client has a net worth of between $50,000 and $700,000.

Because Medicaid is for needy individuals, not individuals with the ability to pay for their own care, a qualified beneficiary must have very limited resources, typically less than $2,000. So, once a person qualifies for Medicaid, it is unlikely that he will ever own anything of any substance again.

With that said, Medicaid does seek estate recovery from the estate of a deceased Medicaid beneficiary for all payments that the Medicaid program made on behalf of that individual after he attained the age of fifty-five. In other words, assume that Mr. Smith begins receiving Medicaid benefits when he is forty years of age. Assume further that Mr. Smith lives until he is seventy years of age and for those thirty years (age forty to age seventy), Mr. Smith continuously receives Medicaid payments towards his health care costs.

When Mr. Smith dies, the Medicaid program will seek estate recovery from Mr. Smith’s estate for all benefits that the program paid after he attained the age of fifty-five. So, if Medicaid had paid $100,000 for health care services for Mr. Smith before he attained the age of fifty-five and $200,000 for such services after he attained then age of fifty-five, then Medicaid will only seek recovery for $200,000 of payments.

You may be wondering why Medicaid would bother seeking estate recovery from poor people. If a person needs to have less than $2,000, why even bother seeking estate recovery from his estate; moreover, the New Jersey regulation on estate recovery provides that the State will note seek recovery if the estate is worth less than $3,000. Given these facts, when would recovery ever happen?

The typical asset against which estate recovery is accomplished is the home. A home is a non-countable asset, so a Medicaid beneficiary can own a home and still qualify for Medicaid. When the Medicaid beneficiary dies, Medicaid will record a lien against the home and when the home sells, the Medicaid lien will need to be satisfied.

If a Medicaid beneficiary is survived by his spouse, then Medicaid will defer estate recovery until the spouse dies. So, if Mr. and Mrs. Smith owned a home and Mr. Smith receives Medicaid, assuming Mr. Smith dies first, Medicaid will wait until Mrs. Smith dies to record a lien against any property that Mr. Smith owned at the time of his death, such as the home if his name were still on the deed to the home when he died.

Most people who hire lawyers are educated to a point where they remove all assets, including the home, from Mr. Smith’s name, so when Mr. Smith dies, he owns no assets and no estate recovery can occur against his home. At least that’s what the law provides.

Lately, I have seen Medicaid get quite aggressive and make claims that they are entitled to recover against Mrs. Smith’s estate when she dies even if the assets in her estate weren’t in Mr. Smith’s estate at the time of his death. This position is untenable, but an uneducated executor of the estate of Mrs. Smith may be intimidated by the long arm of the State’s Medicaid recovery department.