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Jennings v. Commissioner

January 5, 2010


APPEAL by nonparty Commissioner, New York State Department of Health, in a proceeding pursuant to CPLR article 78 to review a determination of the New York State Department of Health dated June 7, 2006, made after an administrative fair hearing, that so much of the income of the petitioner's decedent as was deposited into a supplemental needs trust for the benefit of the decedent's adult disabled son was required to be included in the calculation of the decedent's eligibility and entitlement to Medicaid benefits during her lifetime and in the calculation of the obligation of the decedent's estate for the reimbursement of a certain portion of those benefits, from a judgment of the Supreme Court (Daniel Palmieri, J.), entered in Nassau County on January 12, 2007, which granted the petition and annulled the determination.

The opinion of the court was delivered by: Balkin, J.

Published by New York State Law Reporting Bureau pursuant to Judiciary Law § 431.

This opinion is uncorrected and subject to revision before publication in the Official Reports.


(Index No. 15833/06)


In New York, the concept of a supplemental needs trust originated in 1978,*fn1 establishing a vehicle for parents and guardians of adult children with severe and chronic disabilities to provide for their children's future by transferring their funds to a trust, created to pay for items that will enhance their children's quality of life without jeopardizing their children's eligibility for government benefits, such as Supplemental Security Income (hereinafter SSI), pursuant to 42 USC § 1382 et seq. and Medicaid, pursuant to 42 USC § 1396 et seq. and Social Services Law § 363 et seq.

The issues of first impression at the appellate level are whether the transfer of a settlor/parent's recurring income into a supplemental needs trust created for his or her disabled child must be counted toward (a) the settlor/parent's net available monthly income for calculation of the amount of the Medicaid benefits to which the settlor/parent is entitled after he or she is determined to be eligible for Medicaid (hereinafter post-eligibility benefits) and (b) the obligation of the estate of a deceased settlor/parent for the reimbursement of a certain portion of those benefits. We hold that, in the instant matter, there was a rational basis to include this income in the calculations.


The following facts essentially are undisputed. On September 15, 2004, the petitioner's decedent, Mattie Lou Hammond (hereinafter Hammond), who was then 85 years old, established an irrevocable Supplemental Needs Trust (hereinafter SNT) for the benefit of her 52-year-old son, Frediland Hammond (hereinafter Frediland), who is disabled due to mental retardation and developmental disabilities. Frediland is a recipient of Social Security Disability Insurance (hereinafter SSDI) (see 42 USC § 423) and Medicare benefits (see 42 USC § 401 et seq.), but not Medicaid benefits. Hammond, whose only income consisted of Social Security retirement benefits and a small widow's pension, created the trust by executing a special needs trust agreement (hereinafter the SNT Agreement), which designated her cousin, the petitioner, William Jennings, as trustee, with the discretion to use the SNT income and/or principal to insure that Frediland enjoyed the "benefits of education, recreation, hobbies, vacation, modes of transportation, entertainment, and any other need and/or comforts [he] may require to maximize [his] life and to keep [him] in the general community for so long as medically possible and safe."

The SNT Agreement, which initially funded the trust with the sum of $250, provided that "any person may, at any time, by Court order, assignment, gift, transfer, deed, or will, provide income or add to the principal of the Trust." The SNT Agreement also authorized the trustee to use the income for Frediland's necessary medical care, equipment, and supplies that were not paid for by private insurance or Medicaid. Finally, in accordance with statutory requirements, the SNT Agreement provided for the termination of the SNT upon Frediland's death, with the trustee using any remaining principal and accumulated interest to reimburse or "pay back" the New York State Department of Social Services (hereinafter NYS DSS), the nonparty-appellant, Commissioner, New York State Department of Health (hereinafter the DOH), or any other appropriate "Medicaid entity," for the medical assistance provided to Frediland during his lifetime, before distributing any remaining trust assets to his estate. Coincident with the execution of the SNT Agreement, on September 15, 2004, Hammond moved into a residential health care facility or nursing home in Hempstead, New York. On January 14, 2005, Hammond applied to the Nassau County Department of Social Services (hereinafter the NCDSS) for medical assistance benefits under the Medicaid program, to cover the costs of her own nursing home and medical care, retroactive to October 6, 2004. In her application, Hammond indicated that she had a total gross income in the sum of $1,847 per month, consisting of her Social Security retirement benefits in the monthly sum of $1,173, and a monthly pension benefit in the sum of $607.84; she informed the NCDSS, however, that she had been depositing all of her income into the SNT for Frediland's benefit.

On January 27, 2005, the NCDSS issued a Notice of Intent to Establish Liability Toward Chronic Care, which informed Hammond that she was eligible to receive Medicaid benefits. This determination of entitlement to post-eligibility benefits by the NCDSS is part of a process known as "chronic care budgeting" (18 NYCRR 360-4.9). Although the NCDSS determined that Hammond was eligible for Medicaid since the funds she deposited in Frediland's SNT could be excluded from her income for the purpose of determining her Medicaid eligibility, it simultaneously treated those same funds as income available to her for the purpose of calculating her required contribution for her own post-eligibility monthly cost of care. Specifically, the NCDSS determined that Hammond would have to contribute her Net Available Monthly Income (hereinafter NAMI)*fn2 in the sum of $1,730 per month toward the cost of her post-eligibility Medicaid services, calculated by subtracting, from her gross monthly income of $1,847, a monthly personal needs allowance in the amount of $50 and a monthly Medicare deduction in the amount of $66.

Hammond challenged the determination of the NCDSS, and asked for an administrative fair hearing in connection with the challenge. On May 26, 2006, an administrative fair hearing was conducted by the New York State Office of Temporary and Disability Assistance, which is part of the DOH, the agency responsible for the administration and interpretation of Medicaid laws in New York (see Kuppersmith v Dowling, 93 NY2d 90, 97). Although Hammond did not testify at the hearing, Jennings testified and introduced evidence of the existence and nature of the SNT Agreement, Hammond's application to the NCDSS, and the expenses actually paid from the SNT on Frediland's behalf. According to Hammond, her NAMI should have been "zero" because she deposited all of her monthly income into Frediland's SNT, relying on the rulings of Matter of Kaiser v Commissioner of N.Y.S. Dept. of Health (13 Misc 3d 1211[A]) and Matter of Correri v Commissioner of the NYS Dept. of Health (Sup Ct, Nassau County, May 19, 2005, Index No. 17372/04). The NCDSS disagreed, holding that, while the income placed in the SNT would not render Hammond ineligible for Medicaid, that income was countable for post-eligibility purposes in order to calculate Hammond's required contribution toward her own cost of care.

Following the administrative fair hearing, the Commissioner of the DOH (hereinafter the Commissioner) confirmed the NCDSS's determination in a decision dated June 7, 2006, relying upon past guidance letters and interpretative regulations contained in the State Medicaid Manual (hereinafter the SMM) issued by the United States Department of Health and Human Services' Centers for Medicare and Medicaid Services (hereinafter the CMS). The Commissioner reasoned, in part: "[Ms. Hammond] submitted documentation into the hearing record that [her] income is being deposited monthly into the supplemental needs trust. Such income deposited into the trust is exempt from any of the transfer provisions for purposes of Medical Assistance. However, in order to be exempt as income, the income must be diverted to a trust for [her] benefit. By letter dated September 23, 1997, the Department of Health clarified Administrative Directive 96 ADM 8, and provided that neither the Administrative Directive nor the Regulations allow for the diversion of income to a trust for the benefit of any other individual."

On September 27, 2006, Hammond commenced the instant CPLR article 78 proceeding, seeking to annul the determination rendered by the DOH's designee*fn3 after the fair hearing, on the grounds, inter alia, that it was arbitrary and capricious and affected by an error of law, specifically, that it was contrary to 42 USC § 1396p(c)(2)(B)(iii) and (iv), Social Services Law § 366(5)(d)(3)(ii)(C) and (D), and 18 NYCRR 360-4.4(c)(1)(iii). The DOH and the NCDSS answered the petition, denying the material allegations in the petition and asserting, among other things, that relevant Federal and state laws require "that such [SNT] trusts contain the assets of the individual with the disability" and the "income or resources of [Hammond] placed into a trust are not excluded" under the statutory framework for purposes of calculating her entitlement to her own benefits, or the extent thereof.

In a judgment entered January 12, 2007, the Supreme Court granted the petition and annulled the DOH's determination on the ground that it was arbitrary and capricious and contrary to the Federal and state laws that govern Medicaid eligibility, citing with approval Matter of Kaiser v Commissioner of N.Y.S. Dept. of Health (13 Misc 3d 1211[A]). The DOH appeals.

Hammond died in January 2009, approximately two months after the appeal was argued before this Court. Jennings was subsequently issued limited letters of administration on June 24, 2009, appointing him as administrator of Hammond's estate. Jennings thereafter was substituted for Hammond as the petitioner-respondent on this appeal. We now reverse the judgment of the Supreme Court.


The primary purpose of the Medicaid program is to enable each state, jointly with the Federal government, to furnish "medical assistance on behalf of families with dependent children and of aged, blind, or disabled individuals, whose income and resources are insufficient to meet the costs of necessary medical services" (42 USC § 1396; see Cricchio v Pennisi, 90 NY2d 296, 304-305). For purposes of eligibility for Medicaid, the government considers the amount of an individual's "assets," defined as "all income and resources of the individual and of the individual's spouse, including any income or resources which the individual or such individual's spouse is entitled to but does not receive because of action . . . by the individual or such individual's spouse (42 USC § 1396p[h][1]; see Social Services Law § 366[5][d][1]). If the individual's financial assets fall below a certain income level, he or she becomes eligible for Medicaid benefits.

Throughout the years, non-qualifying individuals have attempted to shelter their assets and income to establish their eligibility for Medicaid benefits (see Matter of Abraham XX, 11 NY3d at 434; Rosenberg, Supplemental Needs Trusts for People with Disabilities: The Development of a Private Trust in the Public Interest, 10 BU Pub Int LJ 91, 127 [2000]), prompting Congress to enact the Omnibus Budget Reconciliation Act of 1993 (hereinafter OBRA), restricting individuals' manipulation of their assets to obtain Medicaid benefits (see 42 USC § 1396p[d][4]). Consonant with OBRA, the New York State Legislature enacted, among other provisions, Social Services Law § 366(5)(d)(3), which, echoing the Federal statute, provides that "[i]n determining the medical assistance eligibility of an institutionalized individual, any transfer of an asset by the individual or the individual's spouse for less than fair market value," made within the three years immediately preceding the date on which the individual was both institutionalized and applied for medical assistance, would render the individual ineligible for Medicaid benefits and nursing-facility services (Social Services Law § 366[5][d][3]; see 42 USC § 1396p[c][1][A], [B]; 18 NYCRR 360-4.4[c][2][ii]).

The Medicaid statutes, however, provide an exemption to this rule, whereby an individual may transfer his or her own income and assets to fund an SNT without having the funds counted as available resources for Medicaid eligibility purposes (see 42 USC § 1396p[c]). Congress permitted these SNTs to be created with the individual's income and/or assets, either as a first-party SNT to benefit the individual himself or herself, or as a third-party SNT benefitting a disabled child or some other third party (see 42 USC § 1396p[c][2][B][iii], [iv]; see also Social Services Law § 366[5][d][3][ii][C], [D]; 18 NYCRR 360-4.4[c][2][iii][c][1][iii], [iv]). In general terms, the structure of each Medicaid-eligible SNT is essentially the same, involving a transfer of assets or income into a trust managed by a trustee for the benefit of a disabled person, with the caveat that the beneficiary must have no control over any disbursements made from the trust and no ability to revoke the trust (see 42 USC § 1382b[e][3][A]; 20 CFR 416.1201[a][1]).

More specifically, and consistent with the Federal regulations, the Legislature codified the definition of an SNT in 1993, pursuant to EPTL 7-1.12, defining it as a "discretionary trust established for the benefit of a person with a severe and chronic or persistent disability" by his or her parent, grandparent, legal guardian, or a court (EPTL 7-1.12[a][5]; see 42 USC § 1396p[d][4][A];*fn4 Sullivan v County of Suffolk, 174 F3d 282, 284, cert denied 528 US 950; SMM § 3259.7[A]). The SNT "shelter[s] a disabled person's assets for the dual purpose of securing and maintaining eligibility for state-funded services, and enhancing the disabled person's quality of life with supplemental care paid by his or her trust assets" (Matter of Abraham XX, 11 NY3d at 434; see Turano, Practice Commentaries, McKinney's Cons Laws of NY, Book 17B, EPTL 7-1.12, at 319). Such an SNT is frequently funded with substantial monetary resources emanating from an inheritance, bequest, gift, real estate property, lawsuit settlement proceeds, or "assets [the settlor] had prior to setting up the trust" (Reames v State of Oklahoma, 411 F3d 1164, 1173, cert denied 546 US 1225; see Cricchio v Pennisi, 90 NY2d at 303; EPTL 7-1.12[a][5][v]; Grassi, Estate Planning for a Family with a Special Needs Child, 23 Probate & Property 14, 16 [Jul/Aug 2009]), and its funds are used "to provide additional health care services and equipment, specialized or unique therapy, private health insurance, educational and vocational training, computers and software, case management services, and recreational activities" for the disabled child or recipient herself (Rosenberg, 10 BU Pub Int LJ, at 95-96 [2000]).

Once Medicaid eligibility is established after disregarding the recipient's funds earmarked for deposit in the SNT, Medicaid requires the computation of the recipient's NAMI available for his or her expected contribution towards his or her own monthly post-eligibility costs of care (see Wong v Doar, 571 F3d 247, 258; 42 CFR 435.832). The post-eligibility treatment of the corpus of a trust established by the Medicaid recipient is governed by 42 USC § 1396p(d)(1), which provides, in relevant part, that such income "shall be considered resources available to the individual . . . [f]or purposes of determining an individual's eligibility for, or amount of, benefits under a State [Medicaid] plan" (42 USC § 1396p[d][1], [d][3][B] [emphasis supplied]). The federal regulation implementing that statute provides that, for ...

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