Co-author: Keith A Stevens
As seen in “Probate Journal of Ohio” May/June 2019.
In spite of statutes and a unanimous Ohio Supreme Court decision, the Ohio Department of Medicaid and the Ohio Department of Job & Family Services (hereinafter referred to as ODM) continues to raise new attacks on third-party special needs trusts. These trusts, created by parents and grandparents for their disabled children and grandchildren, are permitted and intended to allow their beneficiaries to remain eligible for Medicaid healthcare benefits and disability benefits. These trusts have been acceptable for decades in most other states, but Ohio still consistently and often successfully challenges them. It is the state’s desire to deny Medicaid benefits until the trust funds are exhausted, leaving the disabled person without any additional financial support. The administrative and technical challenges we routinely see launched by ODM deny the beneficiary and the trustee basic due process rights.
Case Law and Statutory History
The Ohio Supreme Court has weighed in three times in this matter. In the first, Bur. Of Support in the Dept. of Mental Hygiene & Correction v. Kreitzer 16 Ohio St.2d 147, 45 O.O. 2d 480, 243 NE2d 83 (1968), the Court concluded that where the third-party trust enunciates “an enforceable standard of a fiduciary’s conduct to the extent of providing minimal support for a destitute [beneficiary],” the trustee may be compelled to expend trust funds in support of the beneficiary. Id. at 150. By contrast, the trustee of a completely discretionary trust with no support standard could not be compelled to make a distribution in support of the beneficiary.
Nearly thirty years later, the Court reexamined the issue in Young v. Ohio Department of Human Servs., 76 Ohio St. 3d 547 (1996) and decided that where the trust specifically forbids the use of funds in a way that would deprive the applicant of public benefits, the trust could not be counted. However, as observed by Justice Pfeiffer in his concurrence, a change to the Ohio Administrative Code during the pendency of the case closed this loophole. Following this amendment to the Administrative Code, planners would need to be more careful and opaque in their drafting.
Undeterred by caselaw, ODM then denied benefits due to the presence of a purely discretionary trust in Pack v. Osborn, 17 Ohio St.3d 14, 2008-Ohio-90. After a unanimous decision of the Fifth District Court of Appeals, the ODM appealed that case to the Ohio Supreme Court. The Ohio Supreme Court, following statutory lead, unanimously found that these trusts are appropriate and that such trusts do not affect Medicaid eligibility.
The distinction between support and discretionary trusts was further codified in statute with Ohio Revised Code §5163, passed in 2004, and the Ohio Trust Code, passed in 2007. ODM opposed these statutory changes from the outset and have only adhered to the statute due to the Supreme Court’s decision in Pack. Even then, adherence has been tenuous and inconsistent, as there are currently two separate definitions of what qualifies as a permissible, non-countable trust.
The first of these is found in Ohio Revised Code § 5163.21(G), which counts a trust as available “only if the trust permits the trustee to expend principal, corpus, or assets of the trust for the applicant’s or recipient’s medical care, care, comfort, maintenance, health, welfare, general well-being, or any combination of these purposes.” This is consistent with Kreitzer and is the same definition used in Ohio Administrative Code 5160:1-3-05.2(C)(4).
The Ohio Trust Code introduced a definition for a wholly discretionary trust on its adoption in 2007. This definition does not speak directly to Medicaid and is meant to serve a larger asset protection context, as in cases with a spendthrift beneficiary. However, it accords with the Supreme Court’s decision in Pack. A qualifying Ohio Trust Code wholly discretionary trust is irrevocable, created by a third party, does not contain any ascertainable standards, and the beneficiary of which may not be a settlor or trustee, or exercise any power over the trustee. Ohio Revised Code § 5801.01(Y). The only permissible limitations on a trustee’s discretion are limits on in-kind support and maintenance expenses to allow a beneficiary to continue to qualify for SSI. Ohio Revised Code § 5801.01(Y)(5)(a) and (b).
Planners are encouraged to give more deference to the first definition. In questions of law, Ohio agencies, including administrative hearing officers, adhere first to the Ohio Administrative Code. Ohio Revised Code § 5163.02 holds the Administrative Code supreme, “notwithstanding any provision of state law, including statutes, administrative rules, common law, and court rules.” While the definition is currently consistent with the statute, ODM has shown a willingness to deviate from statutory guidance in the past.
It should be noted that Ohio Revised Code § 5163.11(G)(4) offers a number of savings or exception provisions. By inserting one of these into the trust agreement, an instrument that is not sufficient under the above code sections may still be partially or fully exempt.
The agency has long utilized the state hearing process established by Ohio Revised Code §119 to attack these trusts. The hearing process usually involves a non-attorney acting as a hearing officer, with their decision reviewed by a supervisor. The hearing officer does not have direct access to the case file, only what is submitted by the county and by the applicant. Though the agency is vested with subpoena power, it nearly always declines to issue them and will not require individuals from the county or state to actually testify. Not surprisingly, state hearings concerning Special Needs Trusts are nearly always unsuccessful.
In those rare circumstances where an applicant is successful at a state hearing, the doctrines of res judicata and stare decisis do not apply to ODM, only to the applicant. Even with a favorable hearing decision in place, the county and state can again attempt to terminate or deny benefits on the same grounds.
In Cook v. Ohio Dept of Job & Family Servs., 2015-Ohio-4966 (10th District), for instance, a Florida trust put in place by the mother of the applicant was disclosed to the agency and the Medicaid application was approved. Approximately seven years later, the agency reviewed the Trust again and then decided that it was now a countable asset for Medicaid purposes. Medicaid benefits were terminated and a hearing ensued. The hearing officer sustained the appeal and benefits were reinstated. Soon thereafter, the county again decided that the Trust was vulnerable and issued another termination notice. Again, counsel was able to win a second state hearing on the same grounds. The county then issued yet another termination notice, again with the same result. Approximately six months after the third state hearing, the county again denied benefits and at the fourth state hearing, the county prevailed. This very process outlines the deficiencies and the risks of processing administrative hearings through ODM.
In order to avoid some of the defects in the administrative hearing process, we chose in Pack to pursue a declaratory judgment action in the court of common pleas to pursue a ruling that the trust in question was wholly discretionary. The parties then requested the common pleas court to stay the administrative appeal process as two disparate decisions could be issued regarding the same trust. The Court of Common Pleas granted the motion to stay and later found that the trust was wholly discretionary. The Court of Appeals and Supreme Court disagreed with the substantive part of the Common Pleas decision. The appellate court found, however, that the Common Pleas judge correctly identified the issues and that process was appropriate
At the Supreme Court, both future-Chief Justice O’Connor and then-Chief Justice Moyer approved of the declaratory judgment tactic, as it bound all parties – trustee, beneficiary, and ODM – in one action. The trustee is not a party to the administrative appeals action, while an action by the beneficiary to compel a distribution does not necessarily involve ODM. The declaratory judgment action for an applicant for services, however, allows all the beneficiary, the trustee, and ODM to look out for their individual interests.
The Pack decision, unfortunately, does have a potential negative shadow. In the Cook case mentioned above, the applicant both requested an administrative appeal and sought a declaratory judgment action. However, the agency decided to take a very aggressive approach and first asked that they be dismissed from the declaratory judgment case. The Court of Common Pleas refused to stay the administrative appeal process during the pendency of the declaratory judgment case. The probate magistrate dismissed the agency as a party and issued a decision finding that the Trust was not consistent with the statute.
The Court of Appeals then narrowed down the inquiry under an extremely restrictive interpretation of Pack. According to the Tenth District, Pack stands solely for the proposition that
a court in a declaratory judgment action could provide judicial guidance as to whether a trust is a pure discretionary trust or a discretionary trust with a support standard. Such an interpretation of a trust could then be used in the Medicaid-eligibility review process to determine whether the trust qualifies under one of the exceptions in R.C. 5111.151(G)(4)(e), (g), and (h).
The Tenth District held that the only evidence to rebut the Agency’s finding that the trust was not wholly discretionary was the declaratory judgment. Because the magistrate ruled against the applicant in the declaratory judgment action, she could not provide the necessary evidence to sustain the administrative appeal.
Following this decision, the beneficiary passed away and the Ohio Supreme Court declined jurisdiction. The agency is currently taking the same position in other trust cases. It is the goal of the agency to force individuals through a state hearing process that it has purposely compromised. While this is not a frontal assault upon the Ohio Supreme Court decision in Pack, it is a definite risk to special needs planning. Rather than pursue a legislative process or meaningful appeal to have Pack reversed, the agency has instead chosen to utilize its administrative process to undermine Pack. In its approach, it has been aided by some courts reading an extremely narrow holding into Pack that ignores the basic due process and substantive tenets for which the decision stands.
The Fight Continues
Shortly after this article was submitted, one county came up with a new argument. In an appeal based on one of these third-party trusts being treated as countable, the agency argued that the sole rubric for evaluating trusts is found in Ohio Revised Code § 5163.21. It sought to completely jettison the discretionary-vs-supplemental dichotomy, and simply inquire if the trust could be used for “medical care, care, comfort, maintenance, health, welfare, general well being, or any combination of these purposes,” per Ohio Revised Code §5163.21(G)(2), and if any of the exceptions under Ohio Revised Code §5163.21(G)(4) applies. The agency’s reasoning was that, since the code section has been amended five times since Pack, the state legislature has functionally overruled the Supreme Court. The Agency also made an impassioned public policy argument against these trusts.
However, the Agency’s position on Ohio Revised Code §5163.21 overruling Pack is untenable, as the version of the statute in effect in 2008 when the case was decided (then Ohio Revised Code § 5111.151(G)) differs only in two minor cosmetic ways (“an available resource” becomes “a resource available to the applicant or recipient” and “rules adopted by the department of job and family services” becomes “rules adopted under section 5163.02). This argument an seeks to obfuscate the actual legislative history in an attempt to administratively overturn Kreitzer, Young, and Pack.
To fix the faulty administrative appeal system, it will probably require a federal court finding that the process is constitutionally deficient. The Bar Association has often complained to the agency, but ODM has not shown interest in reforming this process. The rigged, flawed nature of the system is readily apparent to practitioners, so it is somewhat concerning that the Tenth District’s decision in Cook was so unconcerned with the constitutional deficiencies of the administrative process.
ODM’s combativeness undermines the Revised Code and case law. The OSBA, along with the Down’s Syndrome Association, offered meaningful support in Pack against the excesses of the administrative system. Now, the OSBA, parent support organizations, and other allies must prepare for the coming battle, either in state or federal court, over the system itself.