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In Re: Pooled Advocate Trust v. South

March 28, 2012

IN RE: POOLED ADVOCATE TRUST FRED MATTHEWS AND GLADYS MATTHEWS, APPELLANTS,
v.
SOUTH DAKOTA DEPARTMENT OF SOCIAL SERVICES, APPELLEE.



APPEAL FROM THE CIRCUIT COURT OF THE SEVENTH JUDICIAL CIRCUIT PENNINGTON COUNTY, SOUTH DAKOTA THE HONORABLE JEFF W. DAVIS Judge APPEAL FROM THE CIRCUIT COURT OF THE SEVENTH JUDICIAL CIRCUIT PENNINGTON COUNTY, SOUTH DAKOTA THE HONORABLE JANINE M. KERN Judge

The opinion of the court was delivered by: Konenkamp, Justice

ARGUED ON JANUARY 10, 2012

[¶1.] Pooled Advocate Trust, Inc. (PATI), the managing corporation for a Medicaid pooled trust, brought a declaratory judgment action on Medicaid eligibility issues associated with the trust and named the South Dakota Department of Social Services (DSS) as a necessary party. The circuit court granted summary judgment and declaratory judgment for PATI. Fred Matthews and Gladys Matthews transferred assets to the pooled trust. When Fred and Gladys subsequently applied for Medicaid long-term care benefits, DSS imposed a penalty period because they were over age 65 at the time of the transfers. After DSS notified PATI of this policy, PATI petitioned for further relief, seeking a declaration that DSS could not impose penalty periods for transfers made by pooled trust beneficiaries age 65 or older. The circuit court granted PATI's petition. In addition, Fred and Gladys appealed DSS's application of a penalty period, but an administrative law judge (ALJ) upheld the decision and another circuit court affirmed the ALJ's ruling. DSS appeals Circuit Court Judge Jeff W. Davis's order granting PATI's petition for further relief (Appeal #25536). Fred and Gladys appeal Circuit Court Judge Janine M. Kern's affirmance of the ALJ's ruling (Appeal #25902).

Declaratory Judgment

[¶2.] PATI is a nonprofit, South Dakota corporation created to manage the Pooled Advocate Trust dated October 28, 2004 (trust or pooled trust). An irrevocable trust created for the benefit of disabled South Dakota residents, the trust was established in an attempt to meet Medicaid's criteria for pooled trusts under 42 U.S.C. § 1396p(d)(4)(C). Great Western Bank of Rapid City, South Dakota is the trustee.

[¶3.] To join the trust, a potential beneficiary completes a joinder agreement and application and pays a one-hundred-dollar fee. If the application is approved, the beneficiary's transfers are attributed to a trust sub-account that remains separate from other beneficiaries' sub-accounts. Funds from the sub-accounts are comingled for investment and management purposes. During a beneficiary's lifetime, the trustee may distribute funds to supplement the beneficiary's needs to the extent that Medicaid or other programs do not provide for them.

[¶4.] In November 2004, after executing a declaration of trust, PATI petitioned for court supervision of the trust under SDCL 21-22-9. The circuit court granted the petition and entered an order assuming supervision over the trust. At the time, the trust had no beneficiaries and was funded with one dollar.

[¶5.] On the same day the court granted the petition for supervision, PATI brought an action for declaratory judgment. PATI named DSS as a necessary party and sought the following relief: (1) a final judgment and decree that the trust complies with federal and state law regarding Medicaid pooled trusts and that beneficiaries' transfers of assets or property to the trustee will not constitute transfers for purposes of Medicaid eligibility; (2) a final judgment and decree that the trust assets will not be considered an income resource available to beneficiaries for purposes of Medicaid eligibility; (3) a final judgment and decree that the income generated by the trust will not be considered an income resource available to beneficiaries for purposes of Medicaid eligibility; and (4) a final judgment and decree that DSS cannot claim a lien against the assets, property, or income of the trust by virtue of Medicaid benefits provided to the beneficiary except where a beneficiary's sub-account is not retained by the trust. DSS answered, alleging that PATI failed to state a claim upon which relief may be granted.

[¶6.] In June 2005, PATI and DSS stipulated to the filing of cross motions for partial summary judgment. PATI and DSS disputed the legality of certain trust provisions concerning the disposition of sub-account funds following the death of a beneficiary. The parties reserved any other issues not addressed by the cross motions for summary judgment. After briefing, the court ruled for DSS. It concluded that DSS must be reimbursed from a deceased beneficiary's sub-account before funds are distributed to the South Dakota Community Foundation but that funds from the sub-account may be placed back into the trust for the remaining trust beneficiaries. The court ordered reformation of the trust so that it would conform to the court's decision.

[¶7.] In November 2005, PATI moved for summary judgment and declaratory judgment. PATI asserted that the court had essentially ruled on the merits of PATI's complaint and that the only remaining contested issues were whether the complaint stated a claim upon which relief may be granted and whether PATI had standing to bring the declaratory judgment action. In March 2006, PATI and DSS stipulated to the granting of PATI's motions. Accordingly, the court granted PATI summary judgment and declaratory judgment in April 2006. The court ordered that "the trust, as reformed, complies with the law, that transfers to the trust will not be penalized for Medicaid eligibility purposes so long as a beneficiary meets the requirements set forth in the trust as reformed,*fn1 and that amounts in a Trust Sub-Account will not be considered available resources for Medicaid eligibility purposes." At this time, the trust still had no beneficiaries.

[¶8.] Fred, age 91, and Gladys, age 89, husband and wife, both disabled, entered a nursing home in February 2009. A few months later, Fred and Gladys sold their home to their daughter for $100,000, with an initial payment of $50,000. The couple deposited the money into their joint bank account. Fred's monthly income totaled $5,677, comprised of social security benefits, veteran's benefits, and pension proceeds. At that time, an individual with a monthly income exceeding $2,022 was ineligible for certain Medicaid benefits. Because Fred's monthly income exceeded the Medicaid limit, Fred established a Medicaid income trust. Medicaid income trusts allow individuals with monthly incomes exceeding the Medicaid limit to place the income into a trust, subject to certain conditions, to avoid Medicaid ineligibility. Fred created this income trust by removing Gladys's name from their joint bank account. Fred later deposited $8,618.05, the proceeds from his life insurance policy, into his Medicaid income trust because the cash surrender value of a life insurance policy was considered a countable resource for Medicaid eligibility purposes.

[¶9.] In June 2009, Fred and Gladys applied for sub-accounts with the pooled trust, and PATI granted their applications. Fred transferred $50,200 from his Medicaid income trust to PATI. PATI distributed half the funds to Fred's pooled trust sub-account and the other half to Gladys's pooled trust sub-account. Fred later deposited his life insurance policy cash proceeds from his Medicaid income trust into his pooled trust sub-account. In addition, Gladys deposited $6,000 from her savings account into her pooled trust sub-account.

[¶10.] In September 2009, Fred and Gladys separately applied for Medicaid long-term care benefits. While their applications were pending, they received the remaining proceeds from the sale of their home, $50,883.57. They divided the proceeds equally and deposited the funds into their separate pooled trust subaccounts. Thus, between June and September 2009, Fred and Gladys deposited a total of $115,701.62 into the pooled trust.

[¶11.] On October 9, 2009, DSS issued a notice of action to Fred indicating that his application for Medicaid assistance had been denied because "funds deposited into [his Medicaid income trust] have been used for a purpose that exceeded the authorized purposes for which funds can be distributed from the trust under Medicaid rules and under the terms of the trust itself."*fn2 Given this, DSS deemed Fred's Medicaid income trust a non-qualifying trust and any income placed into that trust was countable income for Medicaid eligibility purposes. Because DSS counted all income and resources associated with Fred's Medicaid income trust, Fred's income and resources exceeded Medicaid's eligibility limits.

[¶12.] On November 5, 2009, DSS issued a notice of action to Gladys indicating that she was eligible for medical-only benefits (which does not cover nursing home care) but not for long-term care benefits. DSS advised Gladys that due to the transfers of assets to the pooled trust of $115,701.62, Gladys was subject to a Medicaid transfer penalty period during which DSS would not pay Gladys's long-term care costs.*fn3 DSS noted that the penalty period would end October 1, 2011, and Gladys may thereafter be eligible for long-term care assistance. Both Fred and Gladys requested administrative hearings to challenge these decisions. The hearings were scheduled for December 2009.

[¶13.] A few days after Gladys received her notice of action from DSS, on November 9, 2009, DSS informed PATI via email that DSS "has determined that transfers to a pooled trust by an individual age 65 or older will be treated as a transfer for less than fair value for Medicaid eligibility purposes." The next day, PATI petitioned for further relief on declaratory judgment under SDCL 21-24-12. PATI asserted that the doctrine of res judicata and the 2006 judgment barred DSS from imposing an age limitation, because in 2006 the court ordered that transfers to the trust would not be penalized for Medicaid eligibility purposes. PATI also asserted that the relevant Medicaid statutes do not impose an age restriction for transfers to the pooled trust for purposes of Medicaid eligibility and that a pooled trust may be funded by beneficiaries of any age. PATI asked the court to require DSS to show cause why the relief requested should not be granted.

[¶14.] The circuit court entered an order to show cause and set a hearing on PATI's petition for further relief. The trustee submitted an affidavit indicating that the trust currently had seventeen beneficiary sub-accounts and a market value of approximately $1,650,000. The trustee also stated that three sub-accounts were funded after the beneficiary had reached age 65. The court held a hearing on PATI's petition for further relief on December 14, 2009. At the hearing, DSS mentioned a United States Department of Health and Human Services, Centers for Medicare and Medicaid Services (CMS) policy regarding pooled trust transfers by individuals over age 65. CMS is the federal agency responsible for administering and overseeing federal Medicaid standards. PATI argued that the age limitation issue was already decided in the 2006 proceedings. The court granted PATI's petition for further relief. It "barred [DSS] from imposing a Medicaid divestment penalty based on a beneficiary's age at the time a beneficiary funds a sub-account with the [pooled trust] for that beneficiary's benefit." The court's order also stated: Having determined that this matter involves issues previously adjudicated, the Court does not reach any analysis of federal Medicaid eligibility law. This Court refrains from issuing any specific ruling as to the Medicaid eligibility of any particular trust beneficiary because determinations on whether or not an individual qualifies for assistance under the South Dakota Medicaid Program are to be made by the Department, consistent with this order and applicable law, and no individual Medicaid applicant's eligibility is properly before this Court.

The court did not issue findings of fact or conclusions of law. In a letter to DSS and PATI regarding the order, the court again stated that "the 65 years of age is not relevant to PATI transfers" and that the court "refrained from issuing any specific ruling as to Medicaid eligibility of any particular trust beneficiary. Those decisions are to be made by the Department under the South Dakota Medicaid Program."

[¶15.] DSS moved the court to reconsider its order and filed a brief in support. It discussed and attached a copy of a 2008 CMS memorandum. In part, the memorandum stated that "only trusts established for a disabled individual 64 or younger are exempt from application of the transfer of assets penalty provisions." The memorandum explained that "[i]f States are allowing individuals age 65 or older to establish pooled trusts without applying the transfer of assets provisions, they are not in compliance with the statute. [F]ederal statute requires the application of the transfer rules in this situation; it [is] not a decision for each State to make." DSS argued that this memorandum demonstrated the mandatory nature of the penalty periods.

[¶16.] PATI filed a responsive brief, but DSS filed its notice of appeal on January 22, 2010, before the circuit court could rule on DSS's motion to reconsider. DSS appeals the circuit court's December 2009 order granting PATI's petition for further relief. This Court stayed DSS's appeal until Fred and Gladys exhausted their administrative remedies.

Administrative Appeal

[¶17.] Fred's and Gladys's cases were joined and an administrative hearing was held in February 2010. Before the hearing, Gladys provided the ALJ with a copy of the circuit court's December 2009 order and DSS provided a copy of the 2008 CMS memorandum. Fred and Gladys urged the ALJ to consider the declaratory orders. But despite these orders, the ALJ upheld DSS's imposition of a Medicaid transfer penalty period on Gladys, concluding that the transfers made by Fred and Gladys, who were both over 65 at the time of the transfers, subjected them to the transfer penalty. The ALJ's opinion did not refer to the declaratory judgment action and relied primarily on the CMS memorandum. Fred and Gladys appealed the ALJ's ruling to the circuit court.

[¶18.] Judge Kern issued a memorandum decision, concluding that Fred waived his right to appeal DSS's imposition of a transfer penalty because he originally challenged DSS's notice of action, which indicated only that his Medicaid income trust was being inappropriately used and did not refer to the transfer penalty. Although the ALJ's decision on Fred's Medicaid eligibility was based on the improper transfer of assets to the pooled trust, Fred did not challenge the subsequent transfer penalty for his transfers to the pooled trust.

[ΒΆ19.] As to Gladys, Judge Kern affirmed the ALJ's ruling and stated that "[b]oth the federal and state statute allow for the imposition of a long-term care eligibility penalty for the transfer of assets for less than fair-market value within the statutory period when the benefited individual was not under age 65 at the time of the transfer, and the fact that such a transfer took place is not in dispute." Fred and Gladys ...


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