Opinion ID: 2521350
Heading Depth: 1
Heading Rank: 5

Heading: analysis

Text: Whether federal and state disability trust statutes preclude the payment of accrued income tax from the trust corpus prior to reimbursing the state for medical assistance is a matter of first impression for this court, and we have found no other jurisdiction that has addressed the question. We hold that upon termination, a trustee may pay federal and state taxes due from the corpus of the trust before reimbursing the state for medical assistance it rendered to the beneficiary. This is not a question of conflict preemption; rather, it is a matter of statutory construction. [7] We conclude it is both reasonable and necessary to construe Colorado's disability trust statute to accord with federal and state tax law. In reaching this conclusion, we consider the relevant federal and state laws, as well as applicable administrative guidelines. In Colorado, the Department administers the Medicaid program, and has the duty to comply with its federal requirements. See §§ 26-4-104 to -105, 8 C.R.S. (2003). Under federal law, in order to be eligible for a disability trust, an applicant must comply with three criteria: the trust must 1) contain the assets of an individual under age 65 who is disabled; [8] 2) be established by a parent, grandparent, guardian, or court; and 3) include a provision that the state will be repaid all amounts remaining in the trust up to an amount equal to the total medical assistance paid by the state upon the death of the beneficiary. 42 U.S.C. § 1396p(d). Colorado's disability trust statute, section 15-14-412.8, mirrors the federal law. A disability trust is not valid unless it is created for the purpose of medical assistance and meets the following criteria: the trust must 1) contain the assets of a disabled individual and be established by the individual's parent, grandparent, guardian, or the court; 2) provide that upon the death of the beneficiary or termination of the trust, the Department receives any amount remaining in the trust up to the total medical assistance paid on behalf of the individual; and 3) provide that no person is entitled to payment from the remainder of the trust until the state medical assistance agency has been fully reimbursed for the assistance rendered to the person for whom the trust was created. § 15-14-412.8(2). Both the federal enabling act and Colorado's disability trust statute require that, upon termination, the remainder of trust funds be paid to the state as reimbursement up to the total medical assistance paid on behalf of the beneficiary. The crux of the issue in this case is the meaning of the term remaining or remainder. There are two basic interpretive approaches. The term could be interpreted to mean the gross remainder, precluding all deductions, including the payment of state and federal taxes, prior to the state's reimbursement for medical assistance. Alternatively, the term could be read to denote the net remainder, meaning the funds left in the trust after federal and state taxes are deducted. In this case, the court of appeals adopted the former view, holding that upon termination of a disability trust, section 15-14-412.8 prohibits the deduction of any funds prior to full repayment to the state. Stell argues the court of appeals' interpretation is preempted by federal tax law, and interferes with the purposes and objectives of Congress to collect taxes and provide medical assistance to needy individuals. The Department contends Colorado's disability trust statute comports with federal law, and that preemption analysis does not apply in this case because any conflict that may exist is between the Internal Revenue Code and the federal Medicaid disability trust statute, not between federal and state law. The language of the federal and state statutes regarding the reimbursement of the state upon termination of a disability trust is nearly identical. Federal section 1396p(d)(4)(A) instructs the State will receive all amounts remaining in the trust upon the death of [the beneficiary] up to an amount equal to the total medical assistance paid on behalf of the individual under a State plan.... 42 U.S.C. § 1396p(d)(4)(A). Colorado's section 15-14-412.8 similarly states that, upon the trust's termination, the Department receives any amount remaining in the trust up to the total medical assistance paid on behalf of the individual, and that no person is entitled to payment from the remainder of the trust until the state medical assistance agency has been fully reimbursed for the assistance rendered to the person for whom the trust was created. § 15-14-412.8. Neither statute specifies whether the remainder is gross or net. A trustee has prior obligations under both federal and state tax law to pay taxes due on trust income. Those taxes must be paid, regardless of whether the state is fully reimbursed for the medical assistance it rendered. If there are not enough funds to both pay taxes and reimburse the state, it is neither reasonable nor equitable to impose personal liability on the trustee of a disability trust for the difference. Therefore, we construe the term remainder in section 15-14-412.8 to mean the net remainder, after all taxes due are paid. Our holding, that the payment of taxes must take precedence over reimbursement of the state for medical assistance rendered, harmonizes tax and trust law. Our holding is supported by guidelines published by the SSA in its operating manual POMS regarding the priority of payments upon termination of a disability trust. POMS guidelines are the internal operating instructions used by SSA field employees when processing claims for Social Security benefits. POMS guidelines do not have the force and effect of law; they do not bind the Commissioner of Social Security. Berger v. Apfel, 200 F.3d 1157, 1161 (8th Cir.2000). However, POMS guidelines may be viewed as binding on an ALJ in a case that falls squarely within one of its provisions. See Sabo v. Chater, 955 F.Supp. 1456, 1463 (M.D.Fla.1996). POMS guidelines expressly permit the deduction of taxes and administrative expenses prior to reimbursing the state for medical assistance made to the individual. POMS § SI 1120.203.B.3.a. The payment of funeral expenses, on the other hand, is subordinate to state reimbursements. POMS § SI 1120.203.B.3.b. We note that the State Medicaid Manual, published by CMS, the federal agency administering the Medicaid program, does not conflict with the POMS guidelines. The CMS guidelines use the same non-specific language found in section 1396p(d) and section 15-14-412.8, requiring the trust to contain a provision stating, that upon the death of the individual, the State receives all amounts remaining in the trust, up to an amount equal to the total amount of medical assistance paid on behalf of the individual.... State Medicaid Manual § 3259.7 (2002). Therefore, the CMS manual provides no additional guidance in resolving the priority of payments upon termination of a disability trust. The Uniform Probate Code (UPC), which Colorado has adopted in relevant part, provides additional support for the SSA's reading of the federal enabling act. Colorado follows the UPC in its outline of the procedures a trustee must follow in making final distributions from a regular trust. § 15-1-406(1)(b)(II)-(III), 5 C.R.S. (2003). After a beneficiary dies, or after an income interest in a trust ends, the remainder beneficiary receives net income from the trust. Id. Net income is that which arises after taxes and administrative expenses are paid. Id. Our construction of section 15-14-412.8 brings the state disability trust statute into accord with its federal counterpart. It is also supported by sound public policy. With the Social Security Act, Congress intended to provide medical assistance to needy individuals. Enactment of the Internal Revenue Code served to ensure the comprehensive collection of taxes. The court of appeals' interpretation of section 15-14-412.8 erodes both of these purposes; it deters trustees from administering a disability trust by creating an inevitable potential for personal liability, and improperly shifts tax liabilities. We note that under either party's interpretation of the law, the trust remainder ultimately will end up in the hands of the federal and state government. The difference is only whether the money takes the form of taxes paid or of a reimbursement for medical assistance. In this dispute, the equities do not favor the Department's position. There is no public policy served by leaving the trustee exposed to personal liability for any unpaid taxes upon termination of a disability trust. If a trustee is able to pay taxes due on a disability trust upon the trust's termination and before reimbursing the state for medical assistance rendered, then the trustee can both satisfy the trust's tax obligations and also complete her service as trustee without risking personal liability for unpaid taxes. Interpreting section 15-14-412.8 to refer to the net remainder of funds aligns tax and trust law in a reasonable and equitable manner, and protects the goals Congress intended to promote through its disability trust scheme.