Thursday, Feb. 3, 2011. Author: Peter M. Macy, Esq.
The Doherty case (Doherty v. Director of the Office of Medicaid, 74 Mass. App. Ct. 439 (2009)) sent shock waves through the elder-law bar in Massachusetts in 2009, with its holding that funds in an irrevocable trust could be treated as countable assets for the donors, despite express language in the trust that prohibited distributions of principal to the donors. em>Doherty has been construed as a signal that irrevocable, income-only trusts simply are ineffective as vehicles for gifting of assets in the Medicaid context.
A careful reading of the case, however, suggests a less draconian interpretation. Doherty does tilt the playing field a little further against asset-protection vehicles, but it does not take the law completely off the rails. The rule seems to be that language of a trust will be tortured, but not abrogated, in order to derive an interpretation that defeats Medicaid planning. I think this is just the hand we are dealt in this area of practice, now more than ever.
Some of the drafting decisions that the court points to could have been spotted as risky when the instrument was created. Putting a personal residence in the trust with a provision that it cannot be sold without the consent of the donor is risky. So is providing an early-termination clause that is within the discretion of the trustee. Most of us for many years have inserted requirements that a non-trustee, third-party opinion be obtained before the trustee would have discretion to terminate the trust.
And no one should ever allow a termination clause to be non-specific about who gets the property if the trust is terminated. The trust in Doherty simply referred to “the beneficiaries.” In a context where public policy supports the greatest deterrence to Medicaid planning that the court plausibly can muster, I think we simply have to expect that stretching the meaning of “beneficiaries” to include the donor in a clause as non-specific as that is what the courts will do.
I’m also struck by the court’s willingness to acknowledge that some of the other interpretations by MassHealth were so fanciful that they would not fly, even on an uneven playing field: “We doubt, for example, that the trustees may, willy-nilly, simply characterize a trust asset as ‘income’ and thereby, free of fiduciary fault, convey that asset to [the plaintiff] free of trust.” The court clearly acknowledges a line over which it will not cross. But I think it shows us that any barely-plausible reading of the instrument may be picked up and used to defeat the trust. That’s something we’ve known ever since the Cohen case in 1996.
Finally, it is interesting to note the absence of one argument often discussed by elder-law attorneys, namely the idea that the early termination clause would be construed per se to establish discretion to return principal to the donor, even if the donor is not a recipient of the final distribution. This fear rests on the theory that a right to principal can be attributed to the donors, whether reasonable or not, because the recipients (the children) could be expected to return the funds to the donors if asked. I don’t know whether the state made such an argument to the court, but I would be surprised if it didn’t. And in any event, I think it is significant that the court does not use such an argument in finding the assets to be countable.
In short, Doherty does not mean that an air-tight IOIT cannot be drafted anymore, and it does not mean that pure speculation has become the standard for interpreting trusts in the Medicaid context. It does mean, however, that language will continue to be construed unfavorably to our clients. It means that we have to screen every trust for the kinds of provisions that leave too much control in the hands of the donor, either severally or as a cumulative effect of many provisions that together create too much control for the donor.
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