Key Case Affirms Use of Irrevocable Trusts as Medicaid Planning Tool

As our clients get older, many worry about leaving a legacy for their children.  Some have heard stories of someone they know losing their life savings to the costs of long-term care in a nursing home.  While there are various planning techniques to help shelter assets from the costs of long-term care, a long standing tool in Massachusetts is the irrevocable income-only trust.  This type of trust allows you, the donor, to place assets into it during your lifetime and allows you access to income only, and not principal.  Because of this, the family home has been a common asset placed into these trusts.  The family home does not usually produce income, so placing the this real estate into the trust does not affect the donor/client’s overall cash flow.  After placing assets into this type of trust, if you are able to get past the five year look back period before applying for MassHealth, any assets you place in the trust should be sheltered from the dreaded MassHealth spend down.  When applying for MassHealth you must spend down your countable assets.  The goal of an irrevocable income-only trust is to make any assets placed into it inaccessible, and thus non-countable.

Over the past several years there has been various litigation regarding the validity of these type of trusts.  However, last month the Massachusetts Appeals Court overturned a decision that had terminated MassHealth benefits to a nursing home patient who had placed her home into this type of trust.  In Heyn v. Director of the Office of Medicaid, the court rejected MassHealth’s argument that the nursing home patient’s (the donor of an irrevocable income only trust) home was a countable asset.  MassHealth had argued that because the trust document allowed the Trustee to purchase an annuity with the principal from the potential future sale of the home, and turn it into a stream of income, that this was effectively giving the donor/patient access to the principal.  However, the appeals court held that that trustee’s ability to purchase an annuity did not allow the donor/patient access to principal because the stream of income produced from an annuity was no different from earning interest on an investment account, and thus the house remained a non-countable asset.

This decision gives estate planning practitioners long awaited clarity on the ability of these trusts to be successfully used as a medicaid planning tool.  While there is no guarantee as to what courts will hold in the future, for now there is a strong argument that this type of trust can continue to protect the family home.