In a recent Superior Court of New Jersey, Appellate Division decision, W.F. v. Morris County Department of Family Services, the court reversed the imposition of a Medicaid transfer penalty for funds placed in trust to meet future child support obligations.
Background of the Case
The case involved W.F., an incapacitated individual living in a Care One nursing home due to a long-term alcoholism-related disease. Years before his incapacitation, W.F. entered into a property settlement agreement (PSA) during his divorce, agreeing to pay $23,400 annually in child support and cover half of his children’s future college expenses.
As W.F.’s financial situation deteriorated, his assets became insufficient to cover both his nursing home debts and child support obligations. To ensure his children received the necessary support, an irrevocable Family Trust was established with the approval of the court. This led to a dispute with the Morris County Department of Family Services regarding the classification of these trust funds in the context of Medicaid eligibility. When considering his eligibility for long-term Medicaid (MLTSS), the County argued that the transfer of funds to the trust was improper and imposed a 190 day transfer penalty.
Legal Arguments and Court’s Analysis
The County considered the funds in the Family Trust to be W.F.’s available assets or money he could have used to pay for his care. The County further found the transfer to the Trust for his children to be an improper gift for the purpose of qualifying him for Medicaid. As a result the improper transfer/give resulted in a period of ineligibility for Medicaid benefits, that is, a transfer penalty. However, W.F.’s guardian challenged the imposition of a penalty, arguing that the child support payments were legitimate, court-ordered debts and should not be treated as voluntary transfers.
The Appellate Division examined several key points:
- Definition of Available Resources: Under N.J.A.C. 10:71-4.1(b), resources include any property that can be converted to cash for support and maintenance. Only resources that are “available,” meaning the individual has the right or power to liquidate them, are counted towards Medicaid eligibility. N.J.A.C. 10:71-4.1(c).
- Transfer Penalty Rules: N.J.A.C. 10:71-4.10(a) imposes a penalty if assets are transferred below fair market value during a look-back period (the 60-month period before the Medicaid application is filed). The presumption is that such transfers are made to qualify for Medicaid, unless proven otherwise by the applicant.
- Court-Ordered Transfers: The regulations specify that transfers ordered by a court, not acting at the individual’s behest, may indicate that the transfer was for purposes other than establishing Medicaid eligibility. N.J.A.C. 10:71-4.10(k).
Court’s Decision
The Appellate Division reversed the Division of Medical Assistance and Health Services’ (DMAHS) decision, which upheld the County’s imposition of the transfer penalty. The court found several faults in the DMAHS’s approach:
- Misinterpretation of Gifts: The court held that the transfer of assets to the Family Trust was not a gift by W.F. but a court-ordered reallocation to fulfill pre-existing child support obligations. This distinction is crucial because gifts imply voluntary transfer of assets, whereas court-ordered payments are mandatory and binding.
- Lack of Control Over Assets: W.F. had no control over the funds once they were placed in the irrevocable trust. The trial court, recognizing the children’s entitlement to support, ordered the division of W.F.’s assets accordingly.
- Erroneous Legal Standards: The Appellate Division found that DMAHS misapplied the legal standards of eligibility, and that its actions were unreasonable, arbitrary and capricious. The court emphasized that the allocation of assets to meet pre-existing child support obligations, as mandated by a divorce judgment, was clearly not a gift under the circumstances of this case.
Final Thoughts
By reversing the transfer penalty, the court has once again shown that it favors upholding court-ordered support obligations versus strict interpretation of Medicaid regulations. This case will provide further guidance to Medicaid planning professional dealing with the issue of allocating competing debts and support obligations. It reinforces the principle that mandated child support payments are not gifts but essential support mechanisms protected by law.