In The Matter Of The Estate Of Elenore Gist Iowa ( 2009 )

IN THE SUPREME COURT OF IOWA
No. 07–1142
Filed March 27, 2009
IN THE MATTER OF THE ESTATE OF ELENORE GIST
IOWA DEPARTMENT OF HUMAN SERVICES,
Appellee,
vs.
SUSAN ERAL and COLLEEN CONRAD,
Appellants.
Appeal from the Iowa District Court for Pocahontas County,
William C. Ostlund, Judge.
Trustees appeal a district court order enforcing a Title XIX lien
against the trust assets. AFFIRMED.
Daniel D. Dykstra, Joel D. Vos, and Deena A. Townley of Heidman,
Redmond, Fredregill, Patterson, Plaza, Dykstra & Prahl, L.L.P., Sioux
City, for appellants.
Thomas J. Miller, Attorney General, and Barbara E.B. Galloway,
Assistant Attorney General, for appellee.
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WIGGINS, Justice.
We must decide whether the district court correctly allowed the
State to enforce its Title XIX lien against a trust containing a spendthrift
clause. Because we find the trust is a discretionary trust with
standards, we conclude our common law allows the State to recover its
lien for necessities supplied to the beneficiary from the trust, in spite of
the spendthrift provision. We also conclude the lack of symmetry
between Medicaid’s eligibility requirements and Medicaid’s ability to
recover from an estate does not preclude recovery. Therefore, we affirm
the decision of the district court.
I. Background Facts and Proceedings.
In 1974, Alice and Glenn Pirie signed a joint will leaving all assets
to the surviving spouse. If at the time of death there was not a surviving
spouse, the property was to go to their daughter Elenore Gist, in trust for
her lifetime. After Elenore’s death, the assets would go to Glenn and
Alice Pirie’s granddaughters, Susan Eral and Colleen Conrad f/k/a
Susan and Colleen Gist. In May 1982, after the death of Glenn Pirie,
Alice Pirie signed a codicil to the will appointing Elenore’s daughters,
Conrad and Eral as trustees for the testamentary trust.
Conrad and Eral assumed their role as trustees on August 15,
1983, after the death of Alice Pirie. Elenore Gist was forty-seven years
old at the time. Elenore began receiving Title XIX benefits under the
Iowa medical assistance program in 1995. She continued receiving those
benefits until her death on July 19, 2006.
By January 31, 2007, Conrad and Eral completed the final report
and accounting for the Elenore Gist Trust. The court set the date for the
hearing on that final report for March 12, 2007. On March 6, the Iowa
Department of Human Services filed a claim in probate court against the
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trust for the amounts it paid under Title XIX. The department also filed
an objection to the final report of the trust claiming the final report failed
to provide the department reimbursement for the monies it paid to
Elenore under Title XIX. The department claimed Gist owed $396,570.20
to the State for services she received under Title XIX. By March 9, Eral
and Conrad had filed an amended denial of the claim.
The district court ruled on the claim and objection and found the
trust was a discretionary support trust set up for Elenore Gist and as
such, it should be used to repay her Title XIX debt. Eral and Conrad
appeal.
II. Issues.
In this appeal, we must decide whether the district court erred in
finding the testamentary trust created for Elenore Gist was subject to
Gist’s Title XIX medical assistance debt. If we determine that the trust is
subject to the debt, we must then determine whether the trust’s
identification as a spendthrift trust defeats the State’s claim for
reimbursement. Finally, we must decide whether the lack of symmetry
between Medicaid’s eligibility requirements and Medicaid’s ability to
recover from an estate precludes the State from recovery.
III. Scope of Review.
This case comes to us from a ruling in probate court. The State’s
objections to the trustees’ final report as well as its claim against the
trust are equitable in nature. In re Barkema Trust, 690 N.W.2d 50, 53
(Iowa 2004). Thus, the court’s scope of review is de novo. Iowa R. App.
P. 6.4; Barkema, 690 N.W.2d at 53.
IV. Applicable Trust Provisions.
The relevant provisions of the Piries’ will creating the trust for
Elenore are as follows:
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The trustee shall pay to Elenore for so long as she
shall live at quarterly intervals, or more often the income
from the trust assets or so much thereof as may be
necessary to provide her with a reasonable standard of
living, considering any other means of support or resources
which she may have. If the income shall be insufficient to
provide her with a reasonable standard of living the trustee
may invade the principal or corpus of the trust assets. While
provision is hereinafter made for the disposition of any trust
assets which may remain at Elenore’s death it shall not be
an objective of this trust to preserve the trust estate intact
for the remaindermen beneficiaries nor to deny Elenore a
reasonable standard of living for the purpose of enhancing
the value of the trust estate or even preserving it for the
benefit of the beneficiaries. The discretion of the trustees
shall therefore extend to disbursing the whole of the trust
estate for Elenore’s benefit during her lifetime but, if
possible, the trustee shall make provision for her burial
expenses.
If any trust assets remain at the time of Elenore’s
death they shall be first applied to payment of her burial
expenses. Should tangible property remain in the trust at
the time of her death the trustee shall sell same whether it
be real or personal property. Such remaining assets shall,
after the payment of Elenore’s burial expenses be distributed
to our grandchildren Colleen Gist and Susan Gist to share
and share alike but if they, or either of them have not
attained their majority then the share of the minor or minors
shall continue to be held in trust by the trustee; it shall
make such payments of or from income and principal as it
may be considered necessary for the care, support and
education of any such minor and the balance, if any,
remaining at said minor’s attaining her majority shall then
be paid to her and the trust shall end upon the last such
payment. In the event of the death of either Colleen or
Susan before the time for distribution to them, or either of
them, has arrived then their respective shares shall be paid
to their heirs at law.
All assets of the trust and the income therefrom shall
be free from the claims of any and all creditors of the
beneficiaries thereof and shall not be used for the payment
of their debts or obligations except as may be necessary to
carry out the purposes of the trust. No beneficiary shall
have any power or right to assign, sell, pledge, hypothecate
or in any other manner deal with the trust property. All
restrictions herein contained shall apply equally to include
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every person having a claim against, or making a demand
against the beneficiaries whether such claim or demand is
imposed by law or otherwise, except that lawful taxes may be
collected from the trust assets to the extent permitted by
law.
The last paragraph of the quoted language is a spendthrift provision.
V. Whether the Trust is Subject to Gist’s Title XIX Medical
Assistance Debt.
The State claims Iowa Code section 249A.5 allows it to recover
from the estate the monies it paid on Elenore’s behalf under Title XIX.
Section 249A.5 provides:
The provision of medical assistance to an individual
who is fifty-five years of age or older, or who is a resident of a
nursing facility, intermediate care facility for persons with
mental retardation, or mental health institute, who cannot
reasonably be expected to be discharged and return to the
individual’s home, creates a debt due the department from
the individual’s estate for all medical assistance provided on
the individual’s behalf, upon the individual’s death.
Iowa Code § 249A.5(2) (2005). The Code defines “estate” under chapter
249A as property in which a recipient has “any legal title or interest at
the time of the recipient’s . . . death, to the extent of such interests,
including but not limited to interests in jointly held property, retained life
estates, and interests in trusts.” Id. § 249A.5(2)(c). Iowa adopted this
recovery statute in 1994. 1994 Iowa Acts ch. 1120, § 10 (codified at Iowa
Code § 249A.5(2) (1995)). The assets included within the expansive
definition of “estate” are subject to probate. Iowa Code § 249A.5(2)(d);
see also In re Estate of Serovy, 711 N.W.2d 290, 293–94 (Iowa 2006)
(holding the estate included assets held in joint tenancy and allowing for
recovery of those assets).
We have recently set forth the analytical framework to determine
whether a trust should be subjected to Medicaid recovery under Iowa
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Code section 249A.5(2)(c). Barkema, 690 N.W.2d at 53, 55–56. First, we
must classify the trust at issue. Id. at 53. Next we must determine
whether the beneficiary’s interest in the trust is the kind of interest
encompassed by section 249A.5(2)(c). Id. at 55. Finally, we must decide
whether that interest was present at the time of the beneficiary’s death.
Id. at 56.
A. Classifying the Trust. In Barkema, we identified the two
classifications of support trusts, a pure support trust and a discretionary
support trust. Id. at 53–54. The Restatement of Trusts no longer refers
to the classification of discretionary support trust as a discretionary
support trust. Restatement (Third) of Trusts § 50 (2003). The
Restatement now classifies a discretionary support trust as a
discretionary trust with standards. Helene S. Shapo, George Gleason
Bogert & George Taylor Bogert, The Law of Trusts and Trustees § 228, at
567 (3d ed. 2007). Regardless of whether we refer to a trust as a
discretionary support trust or a discretionary trust with standards, they
are the same animal.
We explained the difference between a pure support trust and a
support trust with standards as follows:
A settlor creates a pure support trust “[i]f a trustee is
directed to pay or apply trust income or principal for the
benefit of a named person, but only to the extent necessary
to support him, and only when the disbursements will
accomplish support.” In contrast, a settlor creates a
[discretionary trust with standards] if “the stated purpose of
the trust is to furnish the beneficiary with support, and the
trustee is directed to pay to the beneficiary whatever amount
of trust income [or principal] the trustee deems necessary for
his support.” Generally, if the trust is a [discretionary trust
with standards],
the beneficiary has a right that the trustee pay
him the amount which in the exercise of
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reasonable discretion is needed for his support
. . . ; and the beneficiary can transfer this
interest or his creditors may reach it, unless it is
protected by a spendthrift clause.
Barkema, 690 N.W.2d at 54 (citations omitted).
The trust agreement created by the joint will of the Piries gave the
trustee the discretion to distribute the income of the trust to Elenore “as
may be necessary to provide her with a reasonable standard of living,
considering any other means of support or resources which she may
have.” The trust gave the trustee the discretion to invade the principal or
corpus to provide her with a reasonable standard of living. The trust did
not limit the principal and corpus payments to the mere support of
Elenore, but allowed those payments to provide her with a reasonable
standard of living. This language created a discretionary trust with
standards. Id.
B. Whether the Beneficiary’s Interest in the Trust is the Kind
of Interest Encompassed by Section 249A.5(2)(c). We have stated
that for purposes of section 249A.5(2)(c) a beneficiary has an “interest” in
a trust to the extent the assets are available to the trust beneficiary. Id.
at 55. In a discretionary trust with standards, the beneficiary has the
right to require the trustee to pay him the amount, which in the exercise
of reasonable discretion is needed to support him. Id. at 54.
Additionally, the beneficiary may transfer his interest and a creditor may
reach it. Id. Accordingly, a beneficiary’s interest in the discretionary
trust with standards is the kind of interest encompassed by section
249A.5(2)(c). Therefore, Elenore’s interest in the trust is the kind of
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interest encompassed by section 249A.5(2)(c), unless the spendthrift
clause of the trust precludes the State from reaching that interest.1
C. Whether the Beneficiary’s Interest in the Trust was Present
at the Time of the Beneficiary’s Death. In Barkema, we determined
that in a discretionary trust with standards, the beneficiary’s interest is
present at the time of the beneficiary’s death. Id. at 56. The trustees
have not contested the district court’s finding that Elenore’s interest in
the trust was present at the time of her death. On appeal the trustees
only contest whether Elenore’s trust was a discretionary trust with
standards and whether that interest was the type encompassed by
section 249A.5(2)(c). Thus, we agree with the district court that the trust
is a discretionary trust with standards, the beneficiary’s interest in the
trust is the kind of interest encompassed by section 249A.5(2)(c), and
that interest was present at the time of her death.
VI. The Effect of the Spendthrift Clause.
Having determined the Gist Trust is the type of trust from which
the State is entitled to reimbursement for its Title XIX claim, we must
determine whether the spendthrift clause protects the assets of the trust.
The trustees argue that the Iowa Trust Code’s provisions on spendthrift
trusts prevent the State from seeking reimbursement from the trust on
its Title XIX lien. The trustees cite Iowa Trust Code sections 633A.2301
and 633A.2302, which provide in relevant part:
633A.2301. Spendthrift protection recognized
Except as otherwise provided in section 633A.2302, all
of the following provisions shall apply:
1The beneficiary’s power to transfer his or her interest or the ability of a creditor
to reach it may be limited by a spendthrift provision under certain circumstances. In re
Barkema Trust, 690 N.W.2d 50, 54 (Iowa 2004). See division VI of this opinion for a
discussion on the spendthrift clause of the Gist Trust.
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1. A term of a trust providing that the interest of a
beneficiary is held subject to a “spendthrift trust”, or words
of similar import, is sufficient to restrain both voluntary and
involuntary transfers of the beneficiary’s interest.
....
4. A creditor or assignee of a beneficiary of a
spendthrift trust may not compel a distribution that is
subject to the trustee’s discretion despite the fact that:
a. The distribution is expressed in the form of a
standard of distribution.
b. The trustee has abused its discretion.
Iowa Code § 633A.2301.
633A.2302. Exception to spendthrift protection
A term of a trust prohibiting an involuntary transfer of
a beneficiary’s interest shall be invalid as against claims by
any creditor of the beneficiary if the beneficiary is the settlor.
Id. § 633A.2302.
On its face, these sections of the Iowa Trust Code appear to end
the analysis because the Code does not contain an exception to the
spendthrift protection in the trust for services or supplies provided for
necessities. See Restatement (Third) of Trusts § 59(b) (2003) (providing
an exception to a spendthrift provision in a trust for “services or supplies
provided for necessities”). However, our analysis must continue based
on section 633A.1104 of the Iowa Trust Code, which provides, “[e]xcept
to the extent that this chapter modifies the common law governing
trusts, the common law of trusts shall supplement this trust code.” Iowa
Code § 633A.1104.
Our common law does have an exception to a spendthrift provision
for services or supplies provided for necessities. In re Estate of Dodge,
281 N.W.2d 447, 451–52 (Iowa 1979). There we held a creditor’s claim
may be enforced against the trustee of a support trust subject to a
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spendthrift clause if (1) the claim is for necessary goods or services, not
officiously rendered, which the settlor intended to provide the beneficiary
through trust funds; and (2) the withholding of payment for the goods
and services is not properly within the discretion granted the trustee by
the trust instrument. Id. at 451.
The Iowa Trust Code is silent as to a necessity exception. Sections
633A.2301 and 633A.2302 do not provide that its exceptions are
exclusive. As section 633A.1104 clearly establishes, the common law of
trusts shall supplement the trust code. Our common law has recognized
a necessity exception since 1979. Accordingly, the common law
necessity exception in Dodge still applies notwithstanding enactment of
the Iowa Trust Code. See Martin D. Begleiter, In the Code We Trust—
Some Trust Law for Iowa at Last, 49 Drake L. Rev. 165, 210–11 (2001)
(opining that section 633A.1104 retains the necessity exception).
Applying the exception as set forth in Dodge, the State provided
Elenore with necessary goods or services. The settlor of the trust
intended for the trust to provide a reasonable standard of living for
Elenore, which includes the goods and services provided by the State.
Additionally, because this was a discretionary trust with standards, the
withholding of payment for the goods and services was not properly
within the discretion granted the trustee by the instrument. Barkema,
690 N.W.2d at 54. Therefore, the spendthrift provision of the trust does
not prevent the State from collecting its Title XIX lien.
VII. Symmetry Argument.
The final argument made by the trustees to prevent the State from
enforcing its Title XIX lien is that there should be symmetry between the
determination of whether an asset is available during the lifetime of the
beneficiary for Medicaid eligibility purposes and the determination made
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for estate recovery purposes of whether an asset is included in the
decedent’s estate under Iowa Code section 249A.5. In other words, if an
asset does not make a person ineligible for Medicaid, that asset should
not be used to reimburse the State for its Medicaid payments.
The trustees claim it is unfair not to have symmetry. Whether
there should be symmetry between the eligibility for Medicaid and the
recovery allowed by the State under section 249A.5 is not a decision for
this court. That is a policy decision to be made by the legislature, the
branch of government responsible for enacting the laws governing
Medicaid. Moreover, there are valid reasons for this policy decision.
By not requiring a person to spend all of his or her assets in order
to be eligible for Medicaid, the legislature has allowed the recipient to use
his or her funds for items not covered by Medicaid. Although the
legislature could have just as easily required a recipient to spend all
assets before being eligible for Medicaid, that requirement would create a
significant hardship on Iowa families because Medicaid does not cover
one hundred percent of a person’s expenses. The legislature took a more
humanitarian approach by allowing recipients to keep certain assets to
pay for items not covered by Medicaid. To the extent such assets are not
exhausted at the time of the recipient’s death, however, the legislature
allows the State to recoup its payments from those assets. As a court,
we defer to the legislature on these matters. Consequently, the lack of
symmetry is not a reason for us to hold the State is not entitled to
reimbursement of its Title XIX lien.
VIII. Disposition.
Having determined that the trust is a discretionary trust with
standards, we conclude our common law allows the State to recover its
lien for necessities supplied to the beneficiary from the trust, in spite of
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the spendthrift provision. Because the lack of symmetry between
Medicaid’s eligibility requirements and Medicaid’s ability to recover from
an estate does not preclude recovery, we affirm the decision of the
district court.
AFFIRMED.