On the Leading Edge

I am the Chairman of the Litigation Committee of the National Academy of Elder Law Attorneys, commonly known as NAELA. NAELA has approximately 4,500 members nationwide.  NAELA’s membership consists of attorneys throughout the United States who have a shared interest in legal issues affecting the elderly and disabled.

Being a member of the Litigation Committee is a privilege. I am able to discuss legal issues affecting the elderly and disabled with some of the most experienced elder law attorneys our nation has to offer.  The Litigation Committee fields requests for assistance from elder law attorneys throughout the country who request the assistance of NAELA with litigation in which they are engaged.

Recently, a friend of mine on the Committee–Rene Reixach, Esq., a lawyer from upstate New York who has a storied history litigating various elder law issues–told me about a recent case of his. The litigation occurred in Connecticut, but the impact of the litigation may stretch well beyond the borders of that state.

Medicaid is a medical payment plan for needy individuals. If a person qualifies for Medicaid, Medicaid will pay for many of his medical needs.  As an elder law attorney, I frequently see people who want to qualify for Medicaid because they are residing in a nursing home or assisted living residence, and they want Medicaid to pay for the nursing home or assisted living residence.

From time-to-time, a person who is already on Medicaid or who is seeking to qualify for Medicaid will be the beneficiary of a trust that a family member established for them. For instance, let’s assume that Joe Smith is disabled as the result of a car accident and requires assistance that can only be provided in a nursing home.  Joe qualifies for Medicaid, and Joe has been a Medicaid beneficiary for the past two years.

Joe’s mother dies. Joe’s mother never changed her last will and testament after Joe’s accident, and her Will leaves the entirety of her estate to Joe.  Before his accident, Joe was having problems with alcohol, which contributed to his car accident, so his mother put a trust in her Will for Joe’s benefit.

Joe’s cousin is the trustee of the trust. The money in the trust is to be used for Joe’s health, maintenance, and support.  The trust contains what they call a “spendthrift clause,” which is words in the trust/Will that prevents Joe and Joe’s creditors from accessing the money in the trust until such time as Joe’s cousin-trustee distributes the money from the trust to Joe.

Now, in the past, if a person came to me with a trust such as this, I’d tell them that the trust caused a problem for Joe’s continued Medicaid eligibility because the trust is a “support trust”; the terms of the trust say that the trustee shall distribute money to Joe for his health, maintenance, and support. Such a trust has traditionally been thought to disqualify a person from Medicaid benefits because the money in the trust can be used to pay for the things (such as the nursing home) for which Medicaid is paying.

But after my friend’s recent federal court case in Connecticut, I am re-thinking my attitude on such a trust. Under New Jersey law, Joe, as beneficiary, could potential sue if his cousin fails to make distributions to him from the trust, but Joe’s suit is not a guarantee that he will get additional money from the trust.  The cousin, as trustee, may be acting appropriately; moreover, Joe would have to sue in a court.

Medicaid does not make a person sue to gain access to assets, so if he has to sue, then the money is unavailable. In addition, because of the existence of the spendthrift clause, the money in the trust is unavailable to Joe until actually distributed.

Because of my friend’s case, I believe these type of trusts should not disqualify a Medicaid beneficiary from benefits.

The Intersection of Government Benefits

A recent decision of the United States Court of Appeals for the First Circuit sheds light on a very interesting issue concerning the intersection of the laws governing the Medicaid program and other means-tested government programs, such as HUD housing. A circuit court is a federal appeals court immediately below the Supreme Court of the United States, the highest court in our country.  The first circuit court of appeals serves the New England states such as Massachusetts.

Medicaid is a federal payment program for needy individuals.  If a person qualifies for Medicaid benefits, the Medicaid program will pay for many of that individual’s health needs.  As an elder law attorney, I frequently qualify clients who reside in nursing homes or assisted living residences for benefits.  Medicaid will pay for the care provided in a nursing home or assisted living residence.

Medicaid is asset- and income-based program.  An individual must have a very limited amount of assets, typically less than $2,000, and his income must be insufficient to pay for his care.

The United States Department of Housing and Urban Development (HUD) maintains programs that subsidize needy individual’s housing.  A person who qualifies for HUD housing only has to pay a limited percentage of his monthly income toward his rent.  HUD will pay the remainder of his rent.

HUD housing programs are income-based.  An individual’s income must be below a certain level in order to qualify for HUD housing subsidies.

The laws governing the Medicaid program permit the establishment of certain trusts that cause the assets and the income of the Medicaid beneficiary to be excluded from the determination of his eligibility for Medicaid.  These trusts are commonly known as special needs trusts.  A special needs trust can be established by a disabled individual under the age of sixty-five to hold his assets and income.

For instance, assume that John Smith, aged 55, is disabled.  Mr. Smith receives $300,000 from a lawsuit settlement.  Prior to receiving the settlement, Mr. Smith had been a Medicaid beneficiary for ten years and was reliant upon the services for which Medicaid was paying.  Now that Mr. Smith received $300,000, he will be disqualified from receiving Medicaid benefits until such time as he spends down the settlement.  Much of the settlement might be spent on the medical services for which Medicaid was paying.

Because Mr. Smith is under the age of sixty-five and disabled, he can establish a special needs trust.  By placing his settlement in the special needs trust, Mr. Smith can continue to receive Medicaid benefits.

Let’s assume further that Mr. Smith lives in a HUD subsidized apartment.  He pays 30% of his income toward the cost of the apartment and the HUD housing program pays the remainder of his rent.  Mr. Smith depends upon the HUD program to pay his rent.

Now that Mr. Smith has the $300,000, the investment income he earns from his assets might cause him to lose his HUD subsidy by putting his total income over the limit for HUD housing eligibility.  But what if Mr. Smith places the $300,000 into a special needs trust?  Will this cause the asset and the income those assets earn to be excluded from his personal income?  Remember, a special needs trust is a creature of Medicaid law, not HUD.

In the recent First Circuit case, the court was faced with a situation in which the HUD housing authority was treating all disbursements from a special needs trust as income to the HUD housing beneficiary.  A law governing the HUD housing program holds that settlement proceeds are exempt for purposes of HUD income.

The court held that the exemption for settlement proceeds is not lost when the assets are placed into a special needs trust.  The assets remain exempt.  The income those assets earn would count against a HUD housing beneficiary, though, irrespective of the funds being held in a special needs trust.  So, the Trust adds no benefit for HUD housing purposes, but according to this case, isn’t a detriment to eligibility for the HUD program.  This is a good holding for those individuals seeking to maintain their Medicaid benefits.