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Trustee’s Power To Acquire Annuity f/b/o Settlor Does Not Make Trust “Countable Asset”

Ralph Holmes

In Heyn v. Director of Medicaid, the Massachusetts Appeals Court in an April 15, 2016 decision considered whether provisions in a self-settled trust rendered it a “countable asset” for Medicaid eligibility.  The trust mandated distributions of income to the settlor and authorized the trustee to sell assets for fair value and “to determine, in accordance with reasonable accounting principles and practice and state law, what shall belong and be chargeable to principal and what shall belong and be chargeable to income.”  In light of these provisions, “the hearing officer concluded that the trust authorized distributions of principal to [the settlor]… [and] suggested that the trustee could sell the property, invest the proceeds in an annuity, and then treat the resulting annuity payments as income eligible for distribution.”  The Superior Court affirmed MassHealth’s denial of benefits.

On appeal, the Court of Appeals reversed, finding that, even if the trustee acquired an annuity, he would be obligated to distribute only that portion of the proceeds allocable to income and to retain in the trust the annuity proceeds allocable to principal:

The analysis misapprehends the nature of annuity payments. Annuity payments are comprised of distinct constituent parts. One part is a return of a portion of the principal investment in the annuity itself; the other part is a portion of the investment income earned on the principal investment. Following each payment, the remainder of the principal investment remains in the annuity contract, accruing income. Federal Medicaid law recognizes these distinguishable parts, as does the United States Internal Revenue Code. See, e.g., 42 U.S.C. § 1396p(e)(2)(B) (2012) (distinguishing between the amount of an annuity’s “income or principal” being withdrawn); 26 U.S.C. § 72(a) & (b) (2012). Out of each annuity payment, only the investment income portion would be available for distribution to the grantor from the trust; that portion of each payment representing a return of capital would be required by the trust instrument to be retained in the trust. The income portion available for distribution in such circumstances would be no different in character than interest earned on a certificate of deposit, dividends from stocks purchased and held by the trust, or other income earned on any trust assets. In all events, the trust principal is preserved in the trust, and is not available for distribution to the grantor under the governing provisions of the trust.

In a footnote, the Court stated, “The effect of income distributions on Medicaid eligibility is considered as and when the income is available for distribution, an is not an issue in this case.”

Heyn is yet another illustration of the careful scrutiny given self-settled trusts as countable assets by state Medicaid authorities.