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.