State’s Medicaid Lien Held Applicable to Trust Assets

February 23, 2010 | Erin Herbold


Long-term health care planning often involves the use of trusts to provide a stream of income for a family member in need of long-term care and preserve trust assets for other family members upon the death of the person in need of care.  This case involved a determination as to  whether a particular trust was a "discretionary trust with standards" and, if so, what effect Iowa Code section 633A.4702 (2007) had on the Iowa Department of Human Services' (DHS's) right to recover Medicaid benefits from the corpus of that trust after the beneficiary’s death.  

In 1992, the decedent created a trust for the care and support of his mentally disabled sister.  At the time, he was living with and caring for his sister.  The decedent’s will contained a residuary trust directing that the residuary assets were to be held in trust for his sister.  The trust assets were only to be used for the sister’s benefit once she had depleted all of the assets that she was entitled to from her mother’s estate.  Then, the sister’s access to the trust assets became subject to the trustee’s discretion with the assets remaining at the death of the sister passing to a nephew of the decedent.  Upon the decedent’s death, the sister entered a nursing home and began receiving Medicaid benefits.  She received approximately $300 every month in trust income until her death about 11 years later.  During her time in the nursing home, she never received any of the trust corpus, but did receive over $375,000 of Medicaid benefits.  Upon her death, about $100,000 of trust corpus remained in the decedent’s trust.  The nephew and DHS battled over that remaining balance.  DHS asserted it’s estate recovery lien under Iowa Code §249A.5(2)(a), and the trustee petitioned the trial court for guidance on the disposition of the trust’s corpus.     

The trial court determined that the trust language created a discretionary support trust in which the sister had an interest in accordance with prior Iowa Supreme Court precedent – In re Barkema Trust.  As a result, DHS could recover the sister’s Medicaid debt from the trust corpus.  The trial court also noted that a subsequent change in Iowa law did not change the result.  The court determined that the trust language was clear in that it created an “express mandate” requiring the trustee to use all of the trust assets for the sister’s care.  The trustee appealed on the basis that the trust was not a discretionary support trust and, even if it was, the trustee’s discretion with respect to the trust trumped DHS lien. 

On appeal, the court began their analysis by reviewing two prior Iowa Supreme Court opinions relevant to the issue. InBarkema the court held in favor of DHS where a discretionary support trust specifically gave the beneficiary the legal ability to compel the trustee to invade the corpus of the trust for their support. In Gist, five years later, the court found that the trust was a “discretionary trust with standards.” Thus, while the court’s terminology had evolved, the beneficiary had the same rights to the corpus of the trust and DHS was allowed to recover. 

Next, the appellate court looked to the language of the trust. In this case, the decedent specifically created the trust for the “support and care” of his sister and the trustee was to provide for the sister in its best discretion. Reading the trust document in its entirety and consistent with the decedent’s intent, the appellate court concluded that the “broad discretionary language” of the trust document created a device to provide for the sister’s basic support. 
Finally, the appellate court addressed a concern over the impact of this case on Iowa Code §633A.4702, which allows a trustee full discretion to make or withhold a distribution in the “absence of clear and convincing evidence to the contrary.” However, the court determined that the legislative intent behind this particular code section was that it was only to apply when a beneficiary was trying to compel a beneficiary, which was not at issue in the case.  In re Kinsel Trust, No. 9-898/08-1625, 2010 Iowa App. LEXIS 81 (Iowa Ct. App., Feb. 10, 2010).