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In re Lennon

May 23, 1996


Kentz Jr., J.s.c., Retired and Temporarily Assigned on Recall

The opinion of the court was delivered by: Kentz

Civil Action

This matter is before the court on plaintiffs' verified complaint for the determination of the mental incompetency of Matthew Lennon (Matthew), appointment of a guardian, and for advice and direction concerning a certain trust established under a Declaration of Trust pursuant to a judgment of the Superior Court of New Jersey in 1987, which Matthew is the beneficiary. Plaintiffs now seek court authorization to amend the trust's terms so that the trust funds will only be used to meet those needs which cannot be met through any public or private program of financial entitlements, services, or other benefits.

Plaintiff's are Matthew's parents. John W. Cooper is Matthew's court appointed counsel.

This court adjudicated Matthew a mental incompetent on January 31, 1996 and appointed plaintiffs as guardians of his personand property. The court reserved decision on the remaining issue pending receipt of briefs.

Matthew received approximately $565,000 from a medical malpractice settlement and judgment in 1981 followed by the Declaration of Trust in 1987. After careful investing with the help of a financial advisor, the trust is now valued at approximately $1,700,000. Plaintiffs are the trustees.

Plaintiffs assert that their intent, and that of the court, in initially approving the Declaration of Trust was that the trust provide for the lifelong protection of Matthew and only be used to supplement other resources available to Matthew by meeting those needs which cannot be met through other sources, including but not limited to, any government or private program of financial entitlements, services, or other benefits. Plaintiffs further allege that the current assets held in trust are grossly insufficient to meet all of Matthew's lifetime needs. According to his report, Mr. Cooper is in favor of amending the trust's terms. He did not, however, express an opinion as to how public assistance would view the changes sought. Therefore, it is necessary that the court clarify the purposes for which the funds can be used and determine how any changes may affect Medicaid eligibility.

Plaintiffs rely on the applicable statutes and case law over incompetents and minors for the proposition that a supplemental needs trust (SNT) can be created by the court in order to do whatever is in the best interests of the incompetent.

As noted earlier, the incompetent received a settlement/judgment in 1981, which was later modified by the Declaration of Trust. The current law regarding SNTs is 42 U.S.C. § 1396p(d)(4)(A) which permits such a trust to be created. *fn1 However, this rule was enacted as part of the Omnibus BudgetReconciliation Act of 1993 amendments (OBRA 93), Pub.L. 103-66, § 13611(a) & (b), 107 U.S. Stat 622-626. Section 13611(e)(2)(C) of Pub.L. 103-66 provides that the amendments relating to these new SNTs shall not apply with respect to trusts established on or before August 10, 1993. Therefore, 42 U.S.C. § 1396a(k) *fn2 determines whether such a trust should be permitted under the Medicaid rules.

According to section 1396a(k), in the case of a Medicaid Qualifying Trust *fn3 (MQT), the amounts from the trust deemed available to a grantor for Medicaid eligibility purposes are the maximum amount of payments that may be permitted under the terms of the trust to be distributed to the grantor, assuming the full exercise of discretion by the trustee for the distribution of the maximum amount to the grantor. Under the terms of Matthew's trust, the trustee can expend all of the income for his support and may invade the corpus with court approval. Therefore, assuming maximum discretion, the entire amount of the trust is available for Matthew's benefit.

An MQT is then defined as a trust, or similar legal device, established (other than by will) by an individual (or an individual's spouse) under which the individual may be the beneficiary of all or part of the payments from a discretionary trust.

The sole issue for Medicaid eligibility purposes is who established the trust. Plaintiffs argue that Matthew is not the individual who established the trust pursuant to the MQT definition because it was established by them pursuant to the judgment of the Superior Court. Other jurisdictions have considered this argument. In Forsyth v. Rowe, 226 Conn. 818, 629 A.2d 379 (Conn. 1993) a conservator of estate and person of his son Gregory, created a trust fund from proceeds of a personal injury settlement. The trust was funded by transferring the defendant's proceeds directly into the court approved trust. Plaintiff subsequently applied for Medicaid benefits but his application was rejected, because he had assets in excess of the department's maximum asset limit. Plaintiff appealed this determination, claiming that the "individual" (Gregory) himself did not create the trust as required under § 1396a(k) but that he created the trust as conservator for Gregory. The Connecticut Supreme Court rejected that argument as inconsistent with the history and purposes of both the Medicaid program and § 1396a(k) specifically. The Court held that "[a] trust is established by the person who provides the consideration for the trust even though in form it is created by someone else." Forsyth, supra, 629 A.2d at 384 (quoting Matter of Brooks, 844 F.2d 258, 263 (5th Cir. 1988)); See Lehman v. Commissioner of Internal Revenue, 109 F.2d 99 (2nd Cir. 1940), cert. denied 310 U.S. 637, 60 S. Ct. 1080, 84 L. Ed. 1406 (1940); In re Estate of Hickey, 263 Ill. App. 3d 658, 635 N.E.2d 853 (Ill.App. 1 Dist. 1994, 200 Ill. Dec. 514), cert. denied 115 S. Ct. 1101, 130 L. Ed. 2d 1068 (1995); Stewart v. Merchants National Bank of Aurora, 3 Ill. App. 3d 337, 278 N.E.2d 10 (Ill.App. 2 Dist. 1972), Bogert, Law of Trusts and Trustees, § 41, p. 428 (2d ed. 1984). The court further added that "Gregory provided the funds with which the trust was established when, through the plaintiff, his claim was settled in return for a payment to the trust. Gregory, therefore, is the individual who established the trust." Forsyth, supra, 629 A.2d at 384. Here, the same rationale should apply. Matthew furnished the consideration needed for the creation of the trust when he exchanged his claim against defendants for settlement funds later deposited in trust. Thus, contrary to plaintiffs' argument, I conclude that Matthew is the settlor of the trust.

Moreover, adopting plaintiffs' argument here would lead to an anomalous result by "[construing] the statute to allow a medical applicant to accomplish through acting on [Matthew's] behalf what the law prevents that applicant from doing on his own." Id. at 385.

The Connecticut Supreme Court also determined that the type of trust in question was an MQT under § 1396a(k). Therefore, the funds were considered assets of the incompetent for Medicaid purposes. The court noted that the MQT provisions were designed not as an estate planning tool but as a way to "assure that individuals receiving nursing home and other long-term care services under Medicaid are in fact poor and have not transferred assets that should be used to purchase the needed services before Medicaid benefits are made available." Id. at 385 (quoting H.Rep. No. 99-265, 99th Cong., 1st Sess. 71 (1985)). Several other state courts faced with similar facts have all reached the same Conclusion based on the same rationale. Romo v. Kirschner, 181 Ariz. 239, 889 P.2d 32 (Ariz.App. 1995); Thomas v. Arkansas Department of Human ...

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