IN THE SUPREME COURT OF THE STATE OF KANSAS

No. 88,761

MARY SYLVIA MILLER,

Appellee,

v.

STATE OF KANSAS DEPARTMENT OF SOCIAL AND

REHABILITATION SERVICES,

Appellant.

SYLLABUS BY THE COURT

1. K.S.A. 2002 Supp. 77-529(a)(1) provides that the filing of a petition for an agency's reconsideration of its final order is a prerequisite only for final orders of the Kansas Human Rights Commission, the Kansas Corporation Commission, and the Board of Tax Appeals.

2. When considering a district court's decision reviewing an administrative action, an appellate court will first determine whether the district court observed the requirements and restrictions placed upon it, and then make the same review of the administrative action as was required of the district court under the Kansas Act for Judicial Review and Civil Enforcement of Agency Actions.

3. The legal effect and construction of a written instrument is a question of law. Our review is unlimited.

4. For purposes of Medicaid eligibility determination, a trust is considered to be established by the person who provides the consideration for the trust even though in form it is created by someone else.

5. Under the facts of this case, we hold under Kansas law, the placement of a surviving spouse's elective share of his of her deceased spouse's estate in a trust for future self- benefit disqualifies the surviving spouse from Medicaid eligibility until those funds are deemed to be depleted under applicable administrative rules.

Appeal from Sedgwick district court; KARL W. FRIEDEL, judge. Opinion filed March 7, 2003. Reversed.

Reid Stacey, of Kansas Department of Social and Rehabilitation Services, argued the cause and was on the briefs for appellant.

John W. Jordan, of Wichita, argued the cause and was on the brief for appellee.

The opinion of the court was delivered by

NUSS, J.: This case involves the interpretation of Medicaid statutes, as well as Edward Miller's will and its pourover trust created for the lifetime benefit of his surviving spouse, Mary Sylvia Miller. At issue is whether the State of Kansas Department of Social and Rehabilitation Services (SRS) should consider any part of the trust principal to be a resource available to Mrs. Miller when considering her application for Medicaid benefits after her husband's death. An SRS case manager, a presiding officer from the SRS Office of Administrative Hearings, and the Appeals Committee of the Kansas Department of Administration's Office of Administrative Hearings all determined at least a portion of the principal was an available resource and she was ineligible for benefits. Upon further appeal by Mrs. Miller, the district court reversed and remanded the case to SRS for processing of her claim.

SRS timely appealed. We transferred from the Court of Appeals on our own motion pursuant to K.S.A. 20-3018(c).

We examine three issues on appeal. First, whether Mrs. Miller exhausted her administrative remedies before filing her petition for judicial review. Second, whether the trust is a support trust which makes Mrs. Miller ineligible to receive Medicaid benefits. Third, even if the trust is not a support trust, whether Mrs. Miller is nevertheless ineligible to receive benefits because the trust contains her funds. As more fully discussed below, we hold Mrs. Miller did exhaust her administrative remedies and that the trust is not a support trust, but that the trust contains her funds. She is therefore ineligible for Medicaid, and we reverse.

Facts

By the terms of Edward Miller's will dated December 21, 1978, he provided for the payment of his final expenses and devise of certain limited items of personal tangible property to his children. His will also contained provisions for his wife in the event that she survived him:

"IV.

"In the event that my wife, Sylvia Miller, survives me, I give, devise and bequeath all of the rest, residue and remainder of my property, of whatever kind and wherever located, unto my trustee herein-after named in trust to be held, administered and disposed of as follows:

"A. I am the owner of the residence at . . . Wichita, Kansas, where my wife and I now reside. For so long as my wife, SYLVIA MILLER, desires to reside in such residence, the trustee shall not sell or dispose of such property, but shall maintain the premises . . . .

"B. During the lifetime of my wife, the trustee shall distribute the net income of the trust in quarterly or more frequent installments to my wife.

"C. In addition to the payment of the net income, my trustee may distribute to or for the benefit of my wife, from time to time, so much of the principal of the trust as the trustee, in its sole discretion, may determine is necessary to provide for my wife's care, support, health and wellbeing, giving due regard to the standard of living she enjoyed at the time of my death, and to such other resources or sources of income which may then be available to my said wife.

"D. Upon the death of my wife, the trustee shall pay over and distribute any principal remaining in trust and any undistributed income to my children, CAROLYN J. BAIRD, MICHAEL E. MILLER and JOSEPH R. MILLER, in equal shares."

On December 22, 1978, 1 day after Mr. Miller completed his will and simultaneous with his adoption of a codicil, Mrs. Miller signed a consent to the will, accepting the rights established in the eventual trust in lieu of her spousal entitlements granted in K.S.A. 59-6a202. On April 23, 1995, Mr. Miller died, with Mrs. Miller and his three children surviving him.

Mrs. Miller served as the executrix of the will, submitted it to probate and settled his estate. On January 30, 1996, a Sedgwick County District Court entered a final order closing probate of the estate and construing the will to distribute the entire residuary estate to Mr. Miller's daughter, Carolyn Baird (now Dugan), as Trustee of the Edward A. Miller Testamentary Trust. Since then, Mrs. Dugan has paid Mrs. Miller a total of $1,000 per month from the income and principal of the trust.

After Mrs. Miller's health deteriorated, she applied for Medicaid assistance for the payment of her nursing home expenses on November 9, 2000. As SRS is the state agency charged with administration of the Medicaid program, it requested a copy of the trust and learned the trust's current value exceeded $190,000. SRS considered the full amount of the trust to be available resources from which she could pay her bills. It therefore determined Mrs. Miller was ineligible for Medicaid. Mrs. Miller timely appealed SRS's decision.

In a hearing before an Office of Administrative Hearings presiding officer, Mrs. Miller acknowledged the income of the trust should be attributed to her but denied she had access to the principal. Mrs. Miller claimed the trust was discretionary and that the entire principal of the trust could not be attributed to her for Medicaid eligibility determination purposes. On April 4, 2001, the presiding officer concluded: (1) the income of the trust should be attributed to Mrs. Miller for eligibility determination purposes, (2) the Edward A. Miller Trust was a discretionary trust, and (3) to the extent that Mrs. Miller waived her rights to the spousal elective share of her husband's estate, she created a trust which would be an available resource when determining her eligibility.

On April 8, 2001, Mrs. Miller appealed the presiding officer's initial order to the Appeals Committee of the Kansas Department of Administration's Office of Administrative Hearings. First, she alleged she had never transferred funds into the trust. Second, she argued, by virtue of her waiver executed in 1978, she had no interest in the property of her husband's estate. Following a hearing, the Appeals Committee affirmed the presiding officer's initial order on July 18, 2001.

Mrs. Miller then petitioned for review by the district court. After a hearing, the district court determined it had jurisdiction under the Kansas Act for Judicial Review and Civil Enforcement of Agency Actions, K.S.A. 77-601 et. seq., and that Mrs. Miller had exhausted all required administrative remedies prior to her petition for review. The court further held that because the Edward A. Miller Trust was a discretionary trust funded solely with his property, the principal of the trust was not available when considering Mrs. Miller's Medicaid eligibility.

Discussion/Analysis

Issue 1: Did Mrs. Miller exhaust her administrative remedies before filing for judicial review?

Our threshold issue is whether Mrs. Miller exhausted her administrative remedies. If she did not, then this court has no jurisdiction for the appeal. See NEA-Coffeyville v. U.S.D. No. 445, 268 Kan. 384, 387-89, 996 P.2d 821 (2000). Whether a party is required to or has failed to exhaust its administrative remedies is a question of law over which we have unlimited review. NEA-Coffeyville, 268 Kan. at 387.

In support of SRS's argument that the district court erred in finding Mrs. Miller had exhausted her administrative remedies, it claims she was required to have first requested that the Appeals Committee reconsider its final order before she petitioned for judicial review. This contention is incorrect. K.S.A. 2002 Supp. 77-529(a)(1) clearly provides that the filing of a petition for an agency's reconsideration of a final order is not a prerequisite except for orders of the Kansas Human Rights Commission, the Kansas Corporation Commission, and the Board of Tax Appeals.

Issue 2: Is this a support trust which makes Mrs. Miller ineligible for benefits?

SRS disputes the determinations by the Appeals Committee and the district court that the trust is a discretionary trust, and not a support trust. We make the same review of the Appeals Committee's prior determination as did the district court. Hemphill v. Kansas Dept. of Revenue, 270 Kan. 83, 84, 11 P.3d 1165 (2000). Specifically, under K.S.A. 77-621(c)(4), we determine whether it had erroneously interpreted or applied the law. We also determine the nature, construction, and legal effect of the will and resultant trust. These are all questions of law over which we have unlimited review. Kindel v. Ferco Rental, Inc., 258 Kan. 272, 277, 899 P.2d 1058 (1995); State ex rel. Secretary of SRS v. Jackson, 249 Kan. 635, 641, 822 P.2d 1033 (1991).

Before we determine if the trust is a support or a discretionary trust, a short review of Medicaid and the significance of the trust's legal label is warranted. Congress enacted the federal Medicaid program as Title XIX of the Social Security Act in 1965 as a cooperative federal-state program designed to provide health care to the neediest individuals. See Williams v. Kansas Dept. of SRS, 258 Kan. 161, 164, 899 P.2d 452 (1995). Congress has stated that Medicaid is a program designed to provide basic medical care for those lacking the resources to care for themselves; "[financial planning] techniques that potentially enrich heirs at the expense of poor people are unacceptable." H.R. Rep. No. 265, 99th Cong., lst Sess., pt. 1, at 71-72 (1985). Similarly, this court has held that public assistance is available to the destitute and truly needy and is not intended to provide subsistence to those with other resources. Jackson, 249 Kan. at 644.

Since Kansas has elected to accept federal funds to provide health care to the neediest individuals, and is therefore bound to follow federal laws which govern Medicaid eligibility, this state has joined the federal government and other states in guarding against providing health care for individuals who have their own resources. Toward that end, SRS has been especially watchful for applicants' financial planning techniques which it believes violate the purpose of the Medicaid laws and the accompanying Kansas statutes and regulations. See e.g., Williams, 258 Kan. at 168; Myers v. Kansas Dept. of SRS, 254 Kan. 467, 472-73, 866 P.2d 1052 (1994); Jackson, 249 Kan. at 644; Martin v. Kansas Dept. of SRS, 26 Kan. App. 2d 511, 988 P.2d 1217 (1999); Simpson v. Kansas Dept. of SRS, 21 Kan. App. 2d 680, 906 P.2d 174 (1995), rev. denied 259 Kan. 928 (1996). These cases and others provide detailed background information elaborating on Medicaid's purposes and history that need not be repeated here.

These Kansas cases reveal that SRS has been particularly vigilant regarding trusts. Frequently the salient issue has been whether a trust is a support trust or a discretionary trust. A support trust exists when the trustee is required to inquire into the basic support needs of the beneficiary and to provide for those needs. Myers, 254 Kan. at 471. Eligibility for Medicaid depends on the assets "available" to the applicant, and the support trust is always considered such an available asset. Williams, 258 Kan. at 165 (citing 42 U.S.C. § 1396a(a)(17) [1988]); Myers, 254 Kan. at 471.

By contrast, a discretionary trust exists when the beneficiary has no right, as a matter of law, to require the trustee to turn over to him or her the principal of the estate or any part of it. Jackson, 249 Kan. at 639-41 (citing Watts v. McKay, 160 Kan. 377, 162 P.2d 82 [1945]). Because the trustee has complete authority to withhold trust assets, a discretionary trust is often not considered an asset/resource available to the beneficiary for determining Medicaid eligibility. See Myers, 254 Kan. at 471; Jackson, 249 Kan. at 639.

In the case at hand, the parties agree that the trust terms require the trustee to pay Mrs. Miller the income. See Edward Miller's Will, Section IV, B quoted previously ("the trustee shall distribute the net income of the trust"). The income should therefore be considered an asset available to Mrs. Miller when considering Medicaid eligibility. See Jackson, 249 Kan. at 641-42.

The trustee's payment of principal is another matter. We agree with Mrs. Miller that its payment is discretionary with the trustee under the trust terms. Edward Miller's Will, Section IV, C, states in relevant part:

"[M]y trustee may distribute to or for the benefit of my wife, from time to time, so much of the principal of the trust as the trustee, in its sole discretion, may determine is necessary to provide for my wife's care, support, health and wellbeing, giving due regard to the standard of living she enjoyed at the time of my death, and to such other resources or sources of income which may then be available to my said wife." (Emphasis added.)

We further agree with Mrs. Miller that the principal is therefore not available to her as an asset under the facts and holding of Myers, 254 Kan. at 469. In Myers, a mother's will created a trust for the care, support, and maintenance of her disabled son during his lifetime. She bequeathed the sum of $110,000 to the trust. Like the case at hand, the principal and undistributed income were to be distributed to relatives upon her beneficiary's death. The trust's language vesting discretionary powers in the trustee was even weaker than the trust language in the case at hand. The Myers' trust language provided that the trustee shall "pay over so much or all the net income and principal to my son as my trustee deems advisable for his care, support, maintenance, emergencies and welfare." (Emphasis added.) 254 Kan. at 470. We concluded the trust was discretionary, not a support trust, and neither the principal nor the income was available to the beneficiary for determining Medicaid eligibility. 254 Kan. 477-78.

Issue 3: Does the trust contain Mrs. Miller's funds which make her ineligible to receive Medicaid benefits?

For SRS's final argument, it alleges that even if the trust is discretionary as to payment of principal, Mrs. Miller nevertheless is ineligible to receive Medicaid benefits because the trust contains her funds. Specifically, SRS claims her consent to the terms of her husband's will, in lieu of her taking her statutory elective share as a spouse, essentially placed her spousal share of the marital estate in the discretionary trust, which makes it an asset currently available to her for determining Medicaid eligibility. For the reasons provided in issue 2 above, our review of this question of law is unlimited. We agree with SRS.

We begin this analysis by returning to a review of Medicaid. As the program evolved, Congress was faced with its escalating costs. As a result, in 1986 Congress amended Medicaid statutes not only to reduce costs but also to respond to the growing problem of individuals transferring their assets or placing them in irrevocable trusts for the purpose of qualifying for Medicaid assistance. In re Guardianship & Conservatorship of Watkins, 24 Kan. App. 2d 469, 471-72, 947 P.2d 45 (1997); Matter of Kindt, 542 N.W.2d 391 (Minn. App. 1996). The Supreme Judicial Court of Massachusetts described the substantial benefits of such irrevocable trusts whose distribution of assets was at the discretion of a trustee:

"Thus, a grantor: was able to qualify for public assistance without depleting his assets; could once more enjoy those assets if he no longer needed public assistance; and,