If a court sets up a special-needs trust funded by a personal injury settlement, do the new Medicaid trust rules under OBRA 1993 treat that trust as if the disabled person established it themselves?

Plain-English summary

North Carolina's Medicaid director asked whether the federal trust rules added in 1993 reached a trust approved by a court and funded directly by an insurer with proceeds of a personal injury settlement or judgment. The AG answered yes. Those proceeds belonged to the person with the injury claim, even if an insurer paid them straight into the trust or a guardian or court formally created it. For purposes of 42 U.S.C. § 1396p(d), the injured person should be treated as providing the trust property and establishing the trust.

The director also asked whether North Carolina had to change its law to defeat trust terms that barred spending on Medicaid-covered expenses or spending that would make a beneficiary ineligible. The AG said such restrictions appeared enforceable under then-existing State trust law, absent a conflict with federal Medicaid law. G.S. § 36A-115(b) protected interests in certain trusts from transfer, and Lineback had honored a settlor's intent to supplement rather than replace public assistance.

That State-law treatment could conflict with the federal Medicaid trust rules. The AG said amendment might not be strictly necessary because federal Medicaid law would control in a conflict under the Supremacy Clause and G.S. § 108A-79(l). The office nevertheless recommended conforming State Medicaid or trust statutes to the 1993 federal changes to avoid confusion and litigation.

Currency note

This opinion interprets the federal and North Carolina statutes in effect in January 1994. Check current Medicaid trust law and State trust law for a present eligibility question.

Background and statutory framework

The opinion distinguished who formally created the trust instrument from who owned the money used to fund it. Settlement or judgment proceeds remained the injured person's property, so a court-approved trust funded with those proceeds fell within the federal provision in the AG's reading.

The opinion also identified a potential State-federal conflict. State trust law could enforce terms limiting access to trust funds, while the new federal Medicaid provision could require a different eligibility treatment. The AG did not say State law furthered the federal rule; it expected federal law to prevail where the two were inconsistent.

Common questions

Does payment directly from an insurer into a court-approved trust avoid the federal rule?

No, in the AG's view. The settlement or judgment proceeds belonged to the person with the personal injury claim, who should therefore be treated as having supplied the trust assets.

Did North Carolina trust law automatically override the Medicaid rule?

No. The AG said State law appeared to enforce certain limits on trust distributions absent federal conflict, but federal Medicaid law would control if the two conflicted.

Did the AG recommend a State-law amendment?

Yes. Although the office thought amendment might not be strictly necessary to enforce the federal provision, it recommended conforming State Medicaid or trust statutes to reduce confusion and litigation.

Source

• Landing page: https://ncdoj.gov/opinions/omnibus-budget-reconciliation-act-of-1993/

Citations

• 42 U.S.C. § 1396p(d) [OBRA 1993 § 13611]
• 42 U.S.C. § 1396p(b)
• U.S. Const. Art. VI, cl. 2 (Supremacy Clause)
• N.C. Gen. Stat. §§ 36A-59.10 to -59.20
• N.C. Gen. Stat. § 36A-115(b) (1991)
• N.C. Gen. Stat. § 108A-79(l)
• Forsyth v. Rowe, 5 Medicare & Medicaid Guide (CCH) New Developments ¶ 41,777 (Conn. Sup. Ct. Aug. 3, 1993)
• Lineback ex rel. Hutchens v. Stout, 79 N.C. App. 292, 339 S.E.2d 103 (1986)

Original opinion text

January 6, 1994

Barbara D. Matula
Director, Division of Medical Assistance
North Carolina Department of Human Resources
Kirby Building 1985 Umstead Drive
Post Office Box 29529
Raleigh, North Carolina 27626-0529

RE: Advisory Opinion; U.S. Constitution, Art. VI, cl. 2; 42 U.S.C. § 1396p(d) [Omnibus Budget Reconciliation Act of 1993, Pub. L. No. 103-66, Title XIII, Ch. 2, Subch. B, Part II, § 13611]; N.C. Gen. Stat. §§ 36A-59.10 to -59.20; N.C. Gen. Stat. § 36A-115(b).

Dear Mrs. Matula:

The following is in response to your request for an opinion as to whether or not the provisions of new 42 U.S.C. § 1396p(d) [OBRA 93 § 13611] encompass a trust created with court approval and with proceeds paid by an insurance company (presumably in settlement of a personal injury claim, or in payment of a judgment) directly into the trust. It is the opinion of this office that § 1396p(d) does encompass such trusts. This is because settlement or judgment proceeds are the property of the individual with the personal injury claim, whether or not the insurance company pays those proceeds into the trust. The person with the personal injury claim should be considered to have provided the proceeds with which the trust was created, and thus to have established the trust. This is so even though in form the trust is created by someone else, such as a guardian or a court. See Forsyth v. Rowe, 5 Medicare & Medicaid Guide (CCH) New Developments ¶ 41,777 (Ct. S. Ct., Aug. 3, 1993). The text of the new 42 U.S.C. § 1396p(d)(2)(A) appears to be premised upon this type of analysis.

You further inquired whether or not it is necessary to change North Carolina law in order to negate trust instrument provisions which prohibit the use of trust monies for Medicaid-covered expenses, or which forbid the use of trust funds in a fashion that would render the trust beneficiary ineligible for Medicaid. It appears that such restrictions on the use of trust monies are enforceable under North Carolina's case law and statutes governing trust instruments, at least absent a conflict with federal Medicaid law.

N.C. Gen. Stat. § 36A-115(b) (1991) provides that a beneficiary's interest in a discretionary, support, or spendthrift trust is neither voluntarily nor involuntarily alienable (i.e., transferable). A discretionary trust is one which provides that the amount, if any, of the trust funds to be received by the beneficiary is within the trustee's discretion. A support trust is one that does not obligate the trustee to pay or distribute any particular amount, but only such sums as the trustee determines, in his discretion, are appropriate for the beneficiary's support, education or maintenance. A spendthrift trust is one in which the creating instrument provides that the beneficiary's interest shall terminate if the beneficiary alienates or attempts to alienate his interest, or becomes bankrupt or insolvent, or if the beneficiary's creditors attempt to reach the beneficiary's interest in the trust. It would seem that such an inalienable interest in a trust is not an available asset for Medicaid eligibility purposes. It further appears that a discretionary or support trust could include a restriction upon the trustee's discretion to distribute trust funds for use for Medicaid-covered expenses, or to make trust funds available to the beneficiary in a fashion that would render the beneficiary ineligible for Medicaid. Indeed, in Lineback ex rel. Hutchens v. Stout, 79 N.C. App. 292, 339 S.E.2d 103 (1986), the North Carolina Court of Appeals held that provisions in a testamentary trust showed that the creator of the trust intended the trust funds to be used to supplement, rather than supplant, public assistance funds for the beneficiary. The beneficiary was a disabled nursing home resident who apparently had received Medicaid benefits to cover the cost of her care. Courts in other states have refused to enforce trust provisions of this nature as contrary to public policy, but such considerations apparently do not trouble the North Carolina courts.

It nonetheless may not be strictly necessary to alter North Carolina law in order to enforce the provisions of § 13611 of OBRA 1993. It seems that the provisions of N.C. Gen. Stat. § 36A-115(b) and the holding in Lineback ought to have been equally problematic vis-a-vis the old Medicaid qualifying trust ("MQT") provisions of former 42 U.S.C. § 1396a(k). We are unaware, however, of any significant difficulty in enforcing the MQT provisions. We suspect this is because under the federal Supremacy Clause [U.S. Const., Art. VI, cl. 2] and N.C. Gen. Stat. § 108A-79(l), federal Medicaid law is controlling in the event that state law is in conflict with it. We nevertheless would recommend that North Carolina amend its Medicaid and/or trust statutes so as to conform with the dictates of OBRA 1993, as conflicts of the type that apparently exists can engender confusion and litigation.

Ann Reed
Senior Deputy Attorney General

Jane T. Friedensen
Assistant Attorney General