Medicaid payback provision

Court Restricts Trust’s Medicaid Payback Provision

It’s a pretty well-understood concept (at least among lawyers and family members). Sometimes you can have assets and still qualify for public benefits. You may be able to establish a special needs trust. But that trust will have to include a Medicaid payback provision.

What is a Medicaid payback provision?

A self-settled special needs trust is one including assets of the public benefits recipient. Federal law permits any one of several people or institutions to establish such a trust. But all must have a provision that reimburses any state Medicaid agency for medical care at the death of the beneficiary or termination of the trust.

Most people would call that a Medicaid payback provision. Experts write volumes about the ins and outs of that provision. The rules even shift over time. But that section must be in the trust, according to a section of federal law. The section in question: 42 United States Code §1396p(d)(4)(A).

But a trust created by someone else, to hold their own money for the benefit of a person with a disability, ordinarily will not include a Medicaid payback provision. Instead, what’s usually called a third-party special needs trust might go to relatives, or charities, on the death of the primary beneficiary.

There is one situation when a third-party trust might provide for Medicaid repayment, though. That happens when the person establishing the trust wants to qualify for Medicaid themselves. Medicaid eligibility ignores gifts made by the applicant to their disabled child. But if the child also receives public benefits, there may need to be a payback provision in the trust.

Albert Pecce’s trust for his daughter Valerie

All of that information is background to help you better understand Albert Pecce’s 2001 trust for his daughter Valerie. At the time, Albert was 70 years old; Valerie was 38 and had been disabled since birth.

The lawyer who drafted Mr. Pecce’s trust for Valerie wrote in a Medicaid payback provision. She even included a specific reference to that federal statute on self-settled trusts. Albert immediately transferred $200,000 into the new trust for Valerie. That same day, he signed a will leaving his entire estate to the trust.

Albert died in 2007. That meant another $450,000 or so went into the trust. The lawyer who drafted the trust died in 2009. The trust continued for another decade, until Valerie’s death in 2017. That set up a legal dispute over who would receive the balance of the trust.

Petition for reformation

Albert’s cousin Gino DiGiacomo asked the Massachusetts probate court to reform Albert’s trust. It was a mistake, he argued, to have included the Medicaid payback provision — and the trust could be reformed to eliminate that section. Then the residue would flow to Gino himself.

Massachusetts, like Arizona, has adopted a version of the Uniform Trust Code. That state law permits courts to consider reforming trusts to “fix” mistakes made when they were first written. But was the inclusion of the payback provision a mistake?

Gino’s argument was that no reasonable person would add such a provision to a third-party special needs trust, when it is not necessary. Of course Albert would have wanted to have his remaining estate flow to his relatives (Gino himself).

The Massachusetts Medicaid agency, however, objected. The agency argued that Albert must have been thinking about his own potential eligibility for Medicaid. After all, he was 70 ;when he signed the trust. His health could deteriorate quickly, and he might need Medicaid himself.

Because the drafting attorney had died shortly after Albert, there was no one to ask about Albert’s intentions. Was he setting up a trust that he could later transfer his assets to, so that he could get Medicaid care without affecting Valerie’s own care? Perhaps — and the language of the trust itself was clear.

The Massachusetts probate judge ruled that the trust could not be reformed. The Medicaid agency would get substantially all of the trust’s assets.

The appellate decision in Massachusetts

The Appeals Court of Massachusetts reviewed the trust, the evidence and the probate court’s ruling. The appellate court decided that the trust could be reformed — or at least partly so.

First of all, ruled the appellate judges, the trust for Valerie was plainly not a “(d)(4)(A)” trust. It could not be, because none of the money in the trust had come from her assets or income.

Still, there was no mistake evident in the trust document itself. Albert might (or might not) have been planning for his own, later, Medicaid eligibility. His lawyer might have included the Medicaid payback provision in order to make it easier for him to qualify for Medicaid if he needed it later. The “mistake,” if any, was not obvious.

But that wasn’t the end of the Appeals Court’s analysis. The notion that Albert was preparing for his own Medicaid eligibility simply would not be relevant upon his death. And so his will, which left his entire remaining estate to the trust for Valerie (complete with its payback provision), was clearly a mistake.

The appellate court thus sent the case back to the probate court for further analysis. They instructed the probate judge to tease out the portions of the trust coming from Albert’s probate estate, and to modify the trust’s terms as to those portions. Cousin Gino could inherit that much of Albert’s remaining trust. Matter of Valerie R. Pecce Supplemental Needs Trust, March 31, 2021.

A few additional thoughts

Note that the name of the trust itself identified it as a “supplemental benefits” trust, rather than a “special needs” trust. Did this make a difference? No; there is no magic in the use of “supplemental” vs. “special” needs.

Would the same result work out in Arizona? Perhaps. In fact, we might even say “probably.” But there’s an obvious and easier way: don’t include a Medicaid payback provision in a third-party trust. The drafting attorney could also have helped out quite a bit by making and keeping good notes. Of course, the drafting attorney could have helped out even more by referring Albert’s estate planning to a capable special needs attorney.

Footnote of some interest: one of the three appellate judges dissented in the Massachusetts case. He would have completely stricken the Medicaid payback provision, and let Gino receive his late cousin’s entire remaining estate.

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