A Power of Appointment Does Not Render Trust Countable Asset

Aug 25, 2021 1:44:00 PM

signing document

A power of appointment is a provision that gives a person, the powerholder, the opportunity to change the ultimate beneficiary of the property subject to the power. Retaining a power of appointment can provide flexibility for future planning and can also provide taxation benefits, such as including the property in the powerholder’s estate.

A general power of appointment, per 26 U.S. Code § 2041(b)(1), “means a power which is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate.” A limited power of appointment limits to whom the property can be appointed. While a general power of appointment is not advisable when planning using a Medicaid Asset Protection Trust, a limited power of appointment is acceptable in many jurisdictions. But what if the limited power of appointment allows property to be appointed to a non-profit organization and the Medicaid recipient is receiving care at a non-profit facility?

This issue was recently litigated in Massachusetts. 

In this case, Misiaszek established an irrevocable trust and appointed her daughter, Patricia, as Trustee. The Misiaszek home was funded into the trust and a limited power of appointment was reserved. The power of appointment allowed Misiaszek to appoint trust property to “any one or more charitable or non-profit organizations over which [she has] no controlling interest”. (Notably, the trust at issue in this case was nearly identical to the trust in the infamous Daley case. In Daley, the court ruled that a reserved right to occupy the home was not a payment from the principal of the trust and thus did not render trust assets countable for Medicaid eligibility. Daley also had a reserved power of appointment; the court had remanded that issue to the lower court for further ruling.)

Misiaszek eventually entered into a nursing home and applied for Medicaid benefits. She was denied due to the reserved power of appointment in her trust. The state argued that Misiaszek was or could be at a non-profit nursing home and so trust principal could be used for her benefit, violating the any circumstances test of 42 U.S. Code § 1396p(d)(3)(B)(i). Misiaszek could appoint trust principal to the non-profit nursing home via the power of appointment.

The Massachusetts Supreme Court was not persuaded by the state’s argument, stating that their theory isn’t “permitted under established principles or trust and property law”. The limited power of appointment did not allow Misiaszek to appoint trust principal for her own benefit. The court quoted Restatement (Third) of Property: Wills and Other Donative Transfers § 19.15 comment d (2011): "[t]he donor may define the permissible appointees of a nongeneral power by exclusion, by inclusion, or by a combination of the two. . . . If they are defined by inclusion, the donor lists the persons to whom a valid appointment can be made." The provision in the Misiaszek trust defined the class of permissible appointees via inclusion; the donee is not automatically included in the list of permissible appointees. It did not matter that the trust did not expressly state that Misiaszek couldn’t appoint principal to herself or for her benefit.

As Massachusetts has a reputation for being difficult when it comes to Medicaid planning, this is a big win for elder law attorneys in that state. In Elder Docx™, a user can draft a Medicaid Asset Protection Trust (MAPT) with a reserved power to add charitable beneficiaries. (Download a MAPT preview now.) This power can be held by the Grantor, the Trust Protector, or by another adverse party. In reserving such power, grantor trust status is achieved and certain benefits are preserved, such as estate inclusion under IRC 2038(a)(1) as a power to change beneficial enjoyment. 

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