Trusts can undermine Medicaid eligibility even if they accomplish other goals

A “Trust” is an estate-planning structure that has many different uses and purposes. Fundamentally, to be valid, there needs to be (a) a Trustee — the manager, who is not the owner of the assets; (b) a Beneficiary – the party that the trustee can spend assets on, who is not the owner of the assets, (c) terms and conditions – usually contained in a legal document which could be a Will or could be another document that creates the Trust. Until a Trust receives assets, it is an unfunded trust and may be referred to as a “dry trust.” Some trusts are irrevocable, others are revocable. Sometimes the Trust is assigned its own taxpayer EIN# which is obtained from the IRS. Sometimes the Trustee is also the Beneficiary; other times the assets are placed in Trust as a gift, for benefit of other family members. . Certain trusts are designed to provide “creditor protection” by shielding the assets from those who might be coming after the beneficiary’s creditors. Certain Trusts are designed to preserve the Beneficiary’s eligibility for means-tested disability-related services. Certain trusts give total discretion to the trustee, whereas others place obligations on the Trustee (such as “pay all the income to the beneficiary for 5 years” or “give the beneficiary 1% of the principal every year in January”). How it is written depends on what the purpose is.

The Medicaid program has strict, low financial restrictions for eligibility. As readers of this blog know, a resource is defined as something that the applicant (or his spouse) owns and which can be converted to cash to be used for the applicant’s support and maintenance. Other than a properly-structured  first-party Special Needs Trust, a residence, one car, an irrevocable funeral trust, a burial place and a life insurance policy whose face value is less than $1,500, pretty much anything else that meets this criteria is treated as a  countable “resource.”  There are special regulations concerning when the assets in a Trust are counted as a resource of the individual.

Section 4.11 of the State Medicaid Manual describes the treatment of Trusts. It applies to trusts that were created by an applicant, his or her spouse, or another party who has legal authority to act on their behalf (Guardian, Agent under Power of Attorney, or Court). It does not apply to trusts created by a spouse of the applicant in their Will (but keep in mind, e.g., the requirements of the DeMartino case and the elective share statute). If assets of the individual or their spouse form any part of the Trust and the individual or their spouse are beneficiaries,  100% of the Trust is a countable resource if the Trust is revocable (such as a “Revocable Living Trust” that some people use to “avoid probate”), and if it is an irrevocable trust, the portion of income or principal that could be paid to or for benefit of the individual (or spouse) continues to be counted as income or as a resource. Either way, any of this could adversely affect eligiblity.  A person might be treated as a Beneficiary without even realizing it.

We see many different Trusts in our practice, and we write Trusts when they are useful. I am frequently asked by new elder care clients, “do I need a trust?”  (and even more often, “I heard that I need a Trust so the nursing home doesn’t take it all”). The response of course is, “what do you want to accomplish, who do you want to protect, how’s your health, and what do we have to work with?”

The problems caused when a Trust is deemed to be a “countable resource” can create substantial financial jeopardy for an applicant, particularly because after the Medicaid application is filed, it may be many months before that bad news is received from the agency.  When discussing a trust strategy later in life, it is a good idea to talk with the attorney about the impact of the Trust on Medicaid eligibility as well as its efficacy for whatever other issues are being addressed. Forewarned is forearmed.

Call us for advice on trusts and Medicaid eligibility and for individualized estate planning strategies …. 732-382-6070

Trust Reformation? What’s that?

Trusts are prepared with an eye toward longevity. A trust is designed to protect assets for benefit of a  beneficiary, both now and for the future. The Trust will specify who will manage it now (the Trustee) and will typically contain a list of successor trustees who can step in later if necessary, and a mechanism for someone to appoint a successor Trustee if there ever is an unfilled vacancy. The Trust is for the living and the not-yet-born. The Trust will specify who receives the funds if a beneficiary dies. The trust will specify the terms and limitations on distributions. A Trust may last for one lifetime or may morph into another form after the death of the primary beneficiary.

Sometimes, the trust is not written in a way that correctly addresses the concerns of the person who established the trust. This could be due to an error or misunderstanding on the part of the “scrivener” (the person who actually “wrote” or prepared the trust). Sometimes, laws that control the effect of such trusts may change, and the original creator (grantor) may not even know it. And sometimes, the original purpose of the Trust is being frustrated due to a change in circumstances after many years. The Trustee of the Trust may discover that certain language in the original trust has now created ambiguities, or is making the beneficiary ineligible for governmental benefits when they should have been eligible.A Trust that was erroneously written as a general discretionary trust may need to be amended to be a special needs trust. What can be done if it’s an irrevocable trust? Generally, a court petition will be needed, and this is called “trust reformation.”

There are two primary legal theories on which a court in New Jersey can “reform” or amend an irrevocable trust. One theory is “scriviner error” — the scriviner knew what needed to be done, and what the grantor wanted, but made an error in the way s/he wrote the trust. The other theory is that it is necessary to reform the Trust to conform to the grantor’s intent — circumstances or laws have created a vacuum within the trust, there’s a lack of clarity as to whether a certain person is intended to be a beneficiary, or law has changed and more specific language is now required in order to adequately protect the Beneficiay the way the grantor wanted.

The party who petitions the court must prove by “clear and convincing evidence” that the amendments should be done and are consistent with the grantor’s actual intentions. The original scriviner of the trust may have to be subpoenaed to testify. Everyone who has a stake in the trust will have to be given Notice of the proceeding. While the court will rely heavily on the express terms of the document, extrinsic evidence can be presented in these cases. Substantial proof will be required, and often that proof must relate back to the time the Trust was created.

When legal problems occur, the law provides a remedy. Don’t despair – just call a lawyer.

For representation on estate and trust planning, special needs and elder care, call … 732-382-6070

What’s a Trust? and Who’s who?

Oftentimes,  a client will come to talk to me and say “I want to put my assets into a trust.” My question of course is,  What are you trying to accomplish? Who suggested it?What do you think a trust is?” Sometimes the answer is, “so my assets don’t get spent on a nursing home.” Often the client says,”I don’t want my assets to be spent on a nursing home, but can I still get money out of the trust if I need it?” The beauty of trusts is that there is so much variety and they can be tailored for each unique situation. So I thought I’d write a post explaining trusts in basic language. Keep in mind that trusts are governed by state law, and this is only a general overview.

A trust is an entity which has a fiduciary who manages the Trust’s assets for someone. It can come into existence and be funded during its creator’s lifetime, or it can spring into existence under the creator’s Will. It can be revocable or irrevocable. It can have one beneficiary or many beneficiaries. The creator may or may not retain control over the funds or access to the funds. The creator may or may not be a beneficiary on whom the funds can be spent.

To create a Trust, a document has to be prepared and signed. Sometimes “the document” is a Last Will and Testament (so the creator is called the Testator); other times “the document” is just a trust document (and the creator is called the Settlor or the Grantor). Since the Trust isn’t a human being, it needs a manager or handler, called the Trustee. The document must specify who the Trustee can spend the money on – that’s the Beneficiary. If the trust will  be a separate taxpayer, it needs an EIN# or taxpayer identification number from the IRS.  When it comes to the assets, I like to describe a Trust as a big empty box. Once it is written, signed, and has an assigned EIN#, it springs to life but is unfunded. The box is empty. The creator of the trust  — or the estate of the deceased person who had written the trust into his Will — transfers assets into the trust; puts them in the box. Now the trust is funded and its life begins.

Who’s who? The Grantor, Settlor or Testator is the person who created the trust. The Trustee is the fiduciary, manager, handler of the trust’s assets, and is the person who makes the decisions concerning the assets. The trustee buys and sells real estate, stocks and bonds; rents out property, signs leases and collects rents; and follows the trust document’s instructions when making decisions about distributions.The Beneficiary is the person whom the Trustee can spend money for. Depending on what the document says, the Beneficiary may have some absolute rights to funds at certain times, or the beneficiary may have to depend on the fair exercise of discretion by the trustee. The Remaindermen are the people who will receive the trust money once the primary beneficiary dies.

Trusts can be revocable or irrevocable. A revocable trust can be cancelled/ revoked by the person who created it. An irrevocable trust cannot be changed or revoked after it is established.

Sometimes the person who created the trust (the Grantor) is the  Beneficiary, and may even be the Trustee as well. This means that they have control over the funds and can spend the money in the trust on themselves. Usually these are called “Living Trusts” or “Revocable Living Trusts.” The funds in these trusts are typically considered available to the Beneficiary to the extent allowed by the document. So if the Grantor needs nursing home care or other health care, the funds in such a trust generally would be considered to be available to them to pay for care, unless the trust itself were specifically restricted.

Sometimes the Trust is restricted. For example. in an income-only trust, the Beneficiary receives all of the income but cannot receive any other distributions. Or the trust might say that the Beneficiary must be given 5% of the total trust every year, but no more than that. If the Settlor is not the beneficiary, then the funds s/he puts into the trust are no longer available to him/her and as a general rule would not be available to spend on care.

Someone has to pay income tax on the trust’s earnings, which are called the income. In some cases, the Trust files its own income tax return and pays the tax. in other cases, the Trust passes the income out to the beneficiaries and files a K-1, in which case the beneficiary reports the income on his/her own income tax returns.

The Trustee is the steward of the funds and has duties to each beneficiary and obligations to carry out the stated purposes of the trust. The trustee is not the owner of the funds, and there are prohibitions on self-dealing by a trustee.

Trusts have many purposes, and a trust that accomplishes one goal (such as “avoiding probate”) will not necessarily accomplish another goal (such as making an asset unavailable to the settlor’s creditors). A discretionary trust will likely not qualify as a special-needs trust. However, placing assets into a trust for one’s family members can have the effect of preserving the assets over a longer term, or keeping them out of the hands of young adults until they are older and more mature. Each situation calls for individualized planning.

Call us to discuss your long-term care and estate planning … 732-382-6070