Simonsen v. Bremby: Transfers between Trusts, the Federal Courts Weigh In

By: Attorney Carmine Perri & Attorney Robert P. Fitzgerald

The United States Court of Appeals for the Second Circuit recently affirmed the U.S. District Court for the District of Connecticut’s holding that two trusts for the benefit of a Medicaid applicant, which were decanted under Florida law, were not available resources for the applicant/beneficiary.  Simonsen v. Bremby, No 15-cv-1399 (VAB), 2015 U.S. Dist. D. Conn. (Dec. 25, 2015), aff’d 679 Fed. Appx 57 (2d Cir. 2017).  

The facts of the case were as follows: The Applicant was a 57 year-old quadriplegic resident at the Hospital for Special Care (“HSC”) in New Britain, Connecticut.  Since October 11, 2013, she required ventilator care.  The Applicant’s mother established a trust that was funded upon her death in 2003.  The Applicant was named the lifetime beneficiary.  The Trust was governed by Florida law and its terms provided for the creation of two, third party inter vivos trusts for the Applicant’s benefit (the “Predecessor Trusts”).  The two Trusts had a combined value of just over one million dollars. 

In August of 2014, the Trustee of the Predecessor Trusts filed in the Probate Division of the Florida Court a petition to transfer or “decant” the Predecessor Trusts’ assets into two third party Special Needs trusts.  The Probate Division of the Florida Court granted the petition in September of 2014. 
 
In July of 2014, one month prior to the decanting of the Trusts, a N01 Medicaid benefits application was filed with the State of Connecticut Department of Social Services (“DSS” or “Department”).  DSS expressed to counsel for the Applicant that if the Applicant should attempt to apply for L01 assistance, she would incur a penalty.  DSS took the position that the trust-to-trust transfer should be treated as a transfer of assets for less than fair value.  In its July 2015, W-495C final decision notice, DSS imposed a penalty period from September 2014 through September 2021.  The Applicant, through counsel, requested an administrative fair hearing.   The fair hearing officer rendered a decision that denied the Applicant’s appeal.  As stated by the U.S. District Court: 

Four main points underscored the fair hearing officer's decision upholding the penalty imposed by DSS. First, she noted that the language of the Predecessor Trusts encouraged the trustee to be liberal in its use of funds for Plaintiff, even to the extent of the full expenditure thereof. . . Second, she determined that the Social Security Program Operations Manual System and its treatment of the spendthrift clause carried no weight, as it was merely a form of internal guidance that was not adopted through the Administrative Procedure Act. . . Third, she concluded that Connecticut's regulatory standard is entirely consistent with the plain language of 20 C.F.R. Case 3:15-cv-01399-VAB Document 36 Filed 12/23/15 Page 6 of 14 § 416.1201(a)(1), which defines resources for purposes of SSI. Id. Fourth, she found the reasoning in the October 24, 2007 Connecticut Superior Court decision in Rome v. Wilson-Coker, Case No. HHBCV064012367S, 2007 Conn. Super. LEXIS 2779—which held that Connecticut's statutory definition of available assets and regulatory application of that definition to non-self-settled trusts is almost identical to the SSI regulatory definition of resources—to further support DSS's position.  

Simonsen, supra *10-11 (2015) (internal citations omitted).

After the DSS fair hearing officer issued her decision, the Applicant, acting through her husband in his capacity as attorney-in-fact, filed a motion for issuance of a temporary restraining order and preliminary injunction in Federal District Court for the District of Connecticut.  In its December 23, 2015 opinion, the District Court held that “[t]he denial of Medicaid benefits has been recognized as per se irreparable injury." Id. *11-12, Citing Fortmann ex rel. Rubino v. Starkowski, No. 3:10-cv-1562, 2011 U.S. Dist. LEXIS 115593, at *16, 2011 WL 4502939, at *4 (D. Conn. Jan. 13, 2011).  The Court then turned to the second question regarding the Applicant’s likelihood of success on the merits of her claim.  In so doing, the Court, citing 42 U.S.C. § 1396(a)(10)(C)(i) and 42 U.S.C. § 1396a(r)(2), endorsed the view that the Medicaid Act firmly prohibits DSS “from employing a methodology for determining income and resource eligibility that is more restrictive than the methodology which would be employed under the SSI program.”  Id. *13.  That legal principle was juxtaposed with the facts in this case.  Specifically, the fact that the Applicant was being denied Medicaid benefits on the basis of the Department’s determination “that the Predecessor Trusts were available resources for purposes of determining her eligibility.”  Id. 

The Court, in making its determination of whether the assets of the Predecessor Trusts would be considered available resources for SSI purposes, first looked to the applicable regulation, 20 C.F.R. 416.1201 and then sought further clarification from the SSA's Program Operations Manual System ("POMS").  The Judge looked to the POMS for guidance in light of Lopes v. Dep’t of Soc. Servs., 696 F.3d 180, 182 (2d Cir. 2012).  Lopes was applied as it held in part:  
   
The POMS is a set of guidelines through which the Social Security Administration further construes the statutes governing its operations. We have held that POMS guidelines are entitled to substantial deference. . . But we have declined to defer to the POMS where the plain language of the statute and its implementing regulation do not permit the construction contained within the manuals.   

Simonsen, citing Lopes v. Dep't of Soc. Servs., 696 F.3d 180, 186 (2d Cir. 2012).   

The opinion held that under POMS that for something to be considered a resource there must be an “ownership interest; the right, authority, or power to convert it to cash; and the legal right to use it for one's support and maintenance.  See, e.g., POMS § SI 01120.010, POMS § SI 01110.100B.1, POMS § SI 01110.100B.3; POMS § SI 01110.115A; POMS § SI 01120.200D.”  Simonsen, supra *15 (2015).  The Court specifically focused on POMS SI § 01120.200D as it applied to the language of the Predecessor Trusts; POMS SI § 01120.200D covers SSI policy regarding trusts as resources and looks, in part, to the beneficiary’s ability to direct the use of the trust principle.  The Court noted that the text of the Trusts did not contain terms providing the beneficiary with any right or authority to direct any payments.

The inquiry into the text of the Trust was guided by Florida law, which stated, in pertinent part, the following: 

an absolute power to invade principal shall include a power to invade principal that is not limited to specific or ascertainable purposes, such as health, education, maintenance, and support, whether or not the term “absolute” is used. A power to invade principal for purposes such as best interests, welfare, comfort, or happiness shall constitute an absolute power not limited to specific or ascertainable purposes.

Fla. Stat. § 736.04117(b) (2017).

The Court recognized Corcoran v. Dep't of Soc. Servs., 271 Conn. 679 (2004) when discussing the text of the Trusts.  The nod to Corcoran supported that court’s holding that “[f]or medicaid purposes, general support trusts are considered available because a beneficiary can compel distribution of the trust income.”  Id. 699.  Lastly, the Court gave weight to the spendthrift clause contained within the Predecessor Trusts, and stated that the effect of such a clause is that the beneficiary has no legal right or authority to access the trust principle, therefore, it is not considered an available resource for SSI and consequently Medicaid.  

DSS appealed the District Court’s preliminary injunction to the Second Circuit.  The Second Circuit affirmed the lower court; the Appellate Court’s decision tracked the reasoning of the lower court.  The Second Circuit agreed that federal law requires state Medicaid plans to implement methodologies that are no more restrictive than those used for the federal SSI program.  The Second Circuit also viewed the language and effect of the Trust in light of the POMS, citing Lopes.  The Court affirmed that the Trust did not afford the applicant the ability to act on her own to apply the principle of the Trust for her benefit.  

This case affirms the holding in Lopes insofar as it states that POMS guidelines are entitled to substantial deference.  The District Court and Second Circuit both heavily relied on federal law when construing the Trust and interpreting the facts.  Fortunately for the Applicant, and for future applicants, the Federal Courts did not allow the Department to ignore the applicable law and the guidelines construing the same.         

Attorney Perri is a Partner with Czepiga Daly Pope & Perri, with offices in Berlin, Simsbury, South Windsor, New Milford, and Madison.  Attorney Fitzgerald is an associate attorney with Czepiga Daly Pope & Perri.